Making Cents: Your financial questions answered
Question
Hi, is there a €1,000 BIK benefit from Revenue and how is it received?
Answer
I think you are referring to what’s known as the small benefits exemption.
Changes were in the Budget on the September 27, 2002 which allowed employees receive up to €1,000 in non-cash benefits each year from their employer.
These payments are exempt from tax under certain conditions, and those conditions are:
The benefits cannot exceed €1,000 in value.
A maximum of two vouchers or benefits are allowed per tax year. Should more than two be given, only the initial two are eligible for tax-free status.
Unused allowances are not transferable to subsequent years.
The aggregate benefit can only be used to purchase goods or services and cannot be exchanged in part or in full for cash.
The aggregate benefit cannot be part of any salary sacrifice arrangement between the employee and employer.
The employer must buy the voucher, an employee can’t purchase it and be reimbursed.
This benefit offers significant tax savings because it’s exempt from PAYE, USC and PRSI and depending on your tax rate, the saving could be as much as €1,313 so it can be an excellent alternative to costlier cash bonuses.
Liam, I’m 27 and currently contribute 9% of my €50,000 annual salary to my pension and my employer contributes 9% also. I’d like to buy a property when I’m 30 so I’m saving for that, but I hear people at work talking about AVC contributions and how I should be investing in them, and I’m confused and not sure what I should be doing. Any help would be appreciated.
First off, the amount you and your employer are contributing is excellent at 18%.
The general rule of thumb % that you should be saving to replace c. 80% of your income in retirement is about 15%, so you’re ahead of that so well done.
But that doesn’t mean you shouldn’t increase your personal contributions either and let me tell you why.
Based on your age, and for tax relief purposes the amount you are allowed to contribute to your pension fund is 15% of your annual salary, so you have room to increase your contributions by an additional 6%.
I’m not suggesting you do, given that you want to buy a property in three years’ time and you’re probably saving hard to build up the deposit you’ll need, and you’re right to focus on doing that, but that’s not to say you shouldn’t increase your pension contributions either.
If for example you increased your contributions by 1%, you’d see your monthly salary decrease by €25 but over time that 1% would grow to about €88,054 when you reach retirement age.
So, think of these three numbers:
1% = €25 = €88,054
By increasing your contributions by small amounts you’re not missing out on the benefit of making those additional voluntary contributions your co-workers are talking about and because the impact at €25 each month is relatively small, it shouldn’t feel restrictive and won’t hold you back saving for that house purchase either.
And it’s finding a balance between the two and I think increasing your contributions in small increments is the way to go, and you can see how small amounts saved turn into big ones when you’re older and that’s because the length of time they are invested and being young is the big advantage you have over others but rather than getting carried away either, slow and steady and small increases added to what you and your employer are contributing I think is a good strategy.
Hi there. My husband and I are selling our house and buying another house. We bought our first house for €100,000 in December 2020 and it has gone sale agreed this month for €188,000. We went travelling for a year within that time and rented out our house for the first year. We were above board with everything and received HAP from our tenants. We will have owned the house for 42 months in total. The solicitor cost to buy the house was €1,500 and to sell is €1,250. The auctioneer cost is 1.5% plus €400. I have heard something about a 12-month exemption as well, but I would like to know how the capital gains tax is going to be calculated now? Thanks.
Revenue are very clear that you can only claim principal private residence relief (PPR) for the time you lived in the property. The 12-month exemption you are referring to is the last 12 months of ownership of your property which is considered to be included in your period of occupation.
And this exemption was primarily introduced for people who move into a new property but still hadn’t sold their previous one.
Anyway, for CGT purposes if the period from when you bought the property to when you sell it is say 42 months i.e. December ’20 to June ’24, and there were 12 months you didn’t live in the property, then I believe you can discount 71% of the gain for capital gains purposes because it was your principal private residence at the time.
I get the 71% number because you were in the property for 30 months of the 42 i.e. 30/42 = 71%.
So, I think €62,480 (€88,000 x 71%) of your €88,000 gain is not subject to CGT, but €25,520 is.
When you apply the cost of buying and selling i.e. solicitor fees and auctioneering fees i.e. €5,970 and your annual exemption of €1,270, that gives a total allowable expense of €7,240 which can be deducted from the taxable gain of €25,520 which means your CGT liability will be €6,032 i.e. €25,520 - €7,240 x 33%.
I’m not a tax expert, so I’d suggest you reach out to one, or to an accountant and ask them to validate these numbers just to make sure whatever CGT you end up paying is correct and that you're tax compliant.
Liam, my fixed rate mortgage is due for renewal and my bank have offered me a variable rate at 3.25%, a 1 year fixed at 3.95%, a 3 and 5 year fixed at 4.05% and a 10 year fixed at 4.35%. Any advice on what I should do?
Interest rates are predicted and expected to drop this year and some commentators are suggesting there will be three drops at a rate of 0.25% each time. And if this happens and it's not a certainty but I think the chances are good it will happen, then I personally would choose the variable rate for the moment.
And if rates do fall, you could then look at fixing your rate because you can switch from variable to fixed at any time, but my advice would be to wait until rates drop and then look at fixed rates and those rates you referred to could be lower than they are now.
Liam, I’m 60 and I have a whole of life insurance policy which covers me for €241,489. The premium is €134.89. I’ve received a letter from the insurer saying my policy is up for renewal and they’re given me some options but I’m not sure which to proceed ahead with. Any help would be appreciated.
The policy you have, as the name suggests lasts for as long as you’re alive. The watch out for this type of policy is that the premiums can start off low, but as you get older the premium is reviewed typically every five years and can increase significantly to the point where it can become very high resulting in people either cancelling the policy or reducing their level of cover.
As I see it you have three options and they are:
- You can maintain your existing level of cover and your monthly premium will remain the same until 2029, and at that stage both will be reviewed.
- You could now reduce your level of cover to €170,000 and keep your monthly premium at €134.89 where both will be guaranteed for 10 years and then reviewed in 2034, or
- You can choose a different policy i.e. convert your existing one to a term assurance policy which guarantees the level of cover and the premium for a fixed period and when that fixed period arrives, the policy ends, and you don’t have an option to continue it. And if you choose this option, the level of cover would now reduce to €110,000 and the cost would be €133.42 per month. The advantage of this type of policy is having certainty that both the level of cover and the monthly premium can’t increase or decrease for the next 25 years.
The answer to which one to choose is very much a personal one and difficult for me to advise which suits you best as I’d need to know a whole lot more about you and your finances but I can tell you that the majority of people I meet would prefer certainty over what their level of cover and monthly premium is going to be over a longer period of time rather than waiting to see what the cost would be in five years or 10 years’ time. Their fear is that the cost could become so high or the level of cover become so low that they end up cancelling it and end up not having any cover in place.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie