Ways for Providing Tax Efficient Savings

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Ways for Providing Tax Efficient Savings
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• Some possible venues for putting your money for
  the long-term while reducing income tax, may be
  contributions to approve provident fund, pension
  fund or term/life insurances or any combination
  of them. In this article, we shall look into
  approved provident funds, their structure,
  purpose, regulations and tax benefits.
• A provident fund is retirement benefit schemes
  where employer and employee pay money. The fund
  is setup as a separate legal entity and must be
  approved by the Department of Social Insurance,
  which regulates all provident funds in Cyprus and
  ensures their efficient operation in favour of
  the employees. The employees making contributions
  elect the Management Committee of the fund, which
  is responsible for the management, administration
  and investment of the moneys.

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• The purpose of the provident fund (which in its
  nature could be defined-contribution or
  defined-benefit plan) is to help employees save
  regularly a portion of their salary, so that when
  the employee retires or leaves the company, he or
  she receives a sum of money. The added benefits
  to the employee are the employer also makes a
  contribution, the fund is invested into a
  diversified investment portfolio and payment to
  an employee is tax-free.
• Since different funds have different rules and
  regulations it is of utmost importance for you
  to read and understand them. For instance, you
  need to know what will be the contribution by the
  employer (e.g. matching your contribution and up
  to what limit or paying fixed percentage of your
  gross salary), the terms of when you can receive
  payment and the way the amount of the payment
  will be determined, where funds will be invested
  etc. Upon termination of employment for example,
  provident funds will pay your contribution
  in-full, but may apply prorata to the employer's
  contributions, depending on the years of
  employment at the company.

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• Contributions by the employer to the provident
  fund are a type of benefit, not subject to income
  tax or social insurance and at the same time
  deductible expense for the employer. Furthermore,
  your contributions (i.e. allowable deduction)
  reduce taxable income, allowing you to pay less
  income tax.
• For employees who earn less then ?20,923 per
  year, provident fund contributions or payments to
  life insurance will not adding any tax benefit,
  because the net taxable income (?20,923 less 6.8
  social insurance) will be ?19,500, which is
  anyway taxed at 0.
• However, for every additional EUR of income, one
  will save on tax if contributing equivalent
  amount to provident fund or life insurance. Say,
  Alice has taxable income of ?45,000 per year,
  contributes ?4,440 (9.87 of her income) is
  deducted 6.8 social insurance (?3,060). The net
  taxable income will be ?37,500 and income tax
  thereof ?4,135. In this example, because of
  taking full advantage of the allowable
  deductions, Alice saves 24 (?1,332) of income
  tax and at the same time has put ?4,440 of
  savings.
• Unfortunately, as everything else in life, there
  is also a limit to allowable deductions. The
  total of social insurance, provident fund,
  medical fund, pension fund and life insurance
  premiums cannot exceed 1/6 (16.7) of taxable
  income. So, if Alice paid ?5,440 to the provident
  fund instead of ?4,440, the additional ?1,000
  will be disallowed and not result in additional
  tax saving.

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• If the employer and employees are willing to make
  contributions they could easily incorporate their
  own provident fund. Some funds in Cyprus consist
  of just handful of employees, other of several
  thousands.
• On the other hand, if your employer is unwilling
  to make contributions but you still want to
  minimize your income tax, life insurance may be
  an option to consider Tax Saving.
• Article Source http//EzineArticles.com/6467945

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