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Ways for providing tax efficient savings

In this article, we will explore two effective strategies for reducing income tax while securing long-term financial stability: contributions to approved provident funds and payments towards life insurance. By combining these approaches, individuals can optimize their tax savings while benefiting from retirement savings and financial protection. Additionally, we will highlight the importance of personalized financial planning and understanding individual circumstances when implementing these strategies.

Approved Provident Funds

A provident fund is a retirement benefit scheme where both the employer and employee contribute funds. This fund is established as a separate legal entity and must receive approval from the Department of Social Insurance, which oversees all provident funds in Cyprus and ensures their efficient operation to benefit employees. The employees making contributions elect the Management Committee of the fund, which is responsible for managing, administering, and investing the funds.

The purpose of a provident fund, whether defined-contribution or defined-benefit in nature, is to encourage regular saving of a portion of employees' salaries. This way, when an employee retires or leaves the company, they receive a sum of money. Additional benefits to the employee include the employer's contributions, the diversification of the fund's investment portfolio, and tax-free payments from the provident fund.

As different provident funds have varying rules and regulations, it is crucial to thoroughly read and understand them. For example, you need to be aware of the employer's contribution - whether it matches your own, has an upper limit, or is a fixed percentage of your gross salary. You should also consider the terms for receiving payments and how the payment amounts are determined, as well as where the funds will be invested. In cases of employment termination, provident funds generally pay the employee's contributions in full but may apply proportional deductions to the employer's contributions based on the years of employment with the company.

Contributions made by the employer to the provident fund are considered a type of benefit, exempt from income tax and social insurance. Additionally, these contributions are deductible expenses for the employer. Furthermore, your own contributions, which are allowable deductions, reduce your taxable income, resulting in lower income tax payments.

For employees with gross earning less than €21,898 per year, contributing to a provident fund or life insurance will not provide any tax benefits. This is because their gross taxable income (€21,898 minus 8.3% for social insurance minus 2.65% for GHS) will fall below €19,500, which is already taxed at 0%.

However, for every additional euro of income, you can save on taxes by contributing an equivalent amount to a provident fund or life insurance. Let's consider an example: Alice has a gross salary of €45,000 per year and contributes €4,050 (9% of her income) to a provident fund. She is also deducted 8.3% for social insurance (€3,735) and 2.65% for GHS (€1,193), all allowances summing up to €8,978. As a result, her taxable income becomes €36,022 with an income tax of €3,706. In this case, by taking full advantage of allowable deductions, Alice saves 24.5% (€1,201) on her income tax while simultaneously saving €4,050.

There is a limit to the total allowable deductions a taxpayer can claim. The sum of social insurance, provident fund, medical fund, pension fund, and life insurance premiums cannot exceed 1/5 (20%) of net income. Therefore, if Alice paid €5,050 to the provident fund instead of €4,050, the additional €1,000 would be disallowed and not result in additional tax savings.

If the employer and employees are willing to make contributions, they can easily establish a private provident fund. Such funds in Cyprus can consist of just a few employees or several thousand.

Lastly, if your employer is unwilling to make contributions but you still want to minimize your income tax, considering life insurance may be an option.

Life Insurance

As Benjamin Franklin famously said in the mid-1700s, "In this world, nothing is certain but death and taxes." Today, these words continue to resonate in the realm of financial products, where death and taxes have manifested as life insurance and tax savings. In this article, we will explore different types of life insurance, their purpose, benefits, specific features, and tax advantages.

The use of life insurance dates back to Roman times and is now one of the most popular methods of tax-efficient savings while providing financial protection for beneficiaries in the event of the insured person's death or financial strain.

The two primary types of life insurance policies available in Cyprus are term and universal life insurance. Term insurance is the simplest form, offering death coverage with fixed premiums for a predetermined period. On the other hand, universal life insurance provides death coverage as well as investment value upon maturity or surrender. With universal life insurance, a portion of the premiums paid goes toward the death benefit, while the remainder is invested according to your chosen investment plans. Compared to universal life insurance, term insurance is less expensive and provides higher death coverage. However, if the insured person does not pass away during the policy term, no benefits will be paid out. Universal life insurance, although more expensive, offers the advantages of adjustable death benefits, premium investments, and payouts upon application. The premiums are also flexible, and you can take a short-term loan against a percentage of the cash value.

Apart from ensuring that you read, understand, and sign the universal life insurance contract in your language (if Greek is not your primary language), there are some practical considerations to keep in mind. One is the cost charged by your insurance provider and the frequency of your premium payments. Initially, a portion or the entirety of your first premiums may be used to cover insurance agent commissions and administrative costs. This cost is often overlooked as it is typically stated as a percentage of your premiums in the agreement. Additionally, making monthly premium payments incurs higher transaction costs compared to quarterly, semi-annual, or annual payments. Opting for less frequent payments not only saves money but also reduces the likelihood of late payments or forgetfulness, which can result in penalties or even termination of the insurance policy.

The main tax benefit associated with life insurance is the tax deduction status granted to premiums. This allows you to reduce your taxable income and consequently pay less tax. While premiums paid for both types of life insurance will lower your taxable income, only universal life insurance serves as an investment vehicle.

Under the current Income Tax legislation in Cyprus, tax-deductible life insurance premiums are limited to a maximum of 7% of the capital sum insured. For instance, if the capital sum insured is €70,000, the maximum allowed premium would be €4,900. In most cases, your premiums will be below this limit set by the law, but exceptions may occur. It's important to note that the tax law only allows deductions for premiums paid by and covering the life of the insured. Premium payments made by a husband for his wife's life insurance, for example, will not be eligible for his deduction. Additionally, the total sum of social insurance, provident fund, medical fund, pension fund, and life insurance premiums cannot exceed 1/5 (20%) of your net income.

If you decide to surrender your universal life insurance policy before the 7th year since its inception, you should consider that 30% of the premiums for which deductions were allowed will be added to your income (if surrender occurs within 3 years from the policy's date) or 20% of the premiums (if surrender takes place within the 4th, 5th, or 6th year). After the 6th year, surrendering your life insurance policy means that the value, along with the investment return, will be paid out to you tax-free.

Financial and Tax Planning Considerations

As illustrated above, contributing to an approved provident fund and making payments towards life insurance are effective pre-tax saving strategies to reduce your tax bill. However, there are important financial and tax planning considerations to bear in mind.

Firstly, it's important to remember that "there is no such thing as a free lunch." When aiming to reduce your income tax, you will need to make certain trade-offs and give up something in return.

For the average taxpayer in Cyprus earning €45,000 per year, utilizing the entire amount of allowable deductions can save up to €1,201 (24.5%) in taxes and provide significant savings (€4,050). Without such deductions, the taxpayer would take home €35,166 instead of €32,316. However, choosing to save on taxes means sacrificing immediate use of €2,850 in disposable income. While some taxpayers can save 9% of their gross income, others may find it challenging due to other financial priorities or obligations such as mortgage payments, children, or school fees. Each individual's financial circumstances and future plans must be carefully considered, as disregarding these factors may result in tax savings that come at an unequal cost.

Secondly, it's crucial to recognize that different tax issues affect individuals at different stages of life. For example, taking out universal life insurance at age 50 may not be the most suitable option, especially if you lack sufficient savings to provide for your family. Opting for term life insurance instead could be more cost-effective and efficient. Developing a holistic plan that balances your desires with what is realistically achievable is of utmost importance.

Lastly, given that income tax and social insurance represent significant annual expenditures for most people, structuring a tax plan is essential to ensure you do not overpay in taxes. It is a common misconception to believe that tax planning is only for the wealthy. While their objectives differ, the benefit of effective tax planning, although slightly smaller in absolute terms, can still be substantial for the average taxpayer. People with substantial wealth often seek out the best tax planning strategies, while middle-class individuals, who work hard, save, and sacrifice, tend to neglect or overlook tax planning. Consequently, becoming aware of tax matters relevant to your situation and planning accordingly will save you money and help you achieve your financial goals.


Maximizing tax efficiency through approved provident funds and life insurance is an effective way to reduce income tax while ensuring long-term financial stability. By understanding the structure, purpose, regulations, and tax benefits of approved provident funds, individuals can make informed decisions about their contributions. Similarly, being aware of the types of life insurance available, their tax advantages, and associated considerations enables individuals to choose the most suitable option based on their needs and goals. By carefully considering their personal financial circumstances and future plans, individuals can develop effective tax planning strategies and optimize their tax savings while working towards their financial objectives.