As already illustrated, contribution to approved provident fund and payments to life insurance are some very efficient pre-tax saving strategies to cut your tax bill; however, there are also few important considerations from financial and tax planning perspective that should be bared in mind.
First of all, “there is no such thing as a free lunch”. It is impossible to take something for nothing and even when you want to reduce your income tax you have to give up something.
For the average Cyprus taxpayer with earnings of €45,000 per year, utilisation of the entire amount of allowable deductions will save up to €1,332 (24%) in tax and provide a good amount of savings (€4,440). Without such deduction, the taxpayer will take home €36,473 instead of €33,365. Therefore, by choosing to save tax, one taxpayer will sacrifice the immediate use of €3,108 in disposable income. For some taxpayers, saving 8%+ from their gross income is easy, while for others not possible, for they have other priorities or pressing commitments such as mortgage payments, children, school fees etc. It is also possible that your family income is not optimally distributed or you are allowed further allowances because you are an expat or part of your income is derived from countries with which Cyprus has tax treaties. You may as well not be the average taxpayer. What these highlights are that ignoring one’s personal financial circumstances and future plans, may lead to saving tax but at unequal cost on the other hand.
Secondly, it is useful to know that different tax issues affect you at a different stage of your life. For example, taking universal life insurance at age 50 may not be the best option, especially if you do not have sufficient savings to cover for your family. It could be cheaper and by far more effective to pay for term life insurance instead. The importance of developing a holistic plan, which balances “what you want” with “what is achievable”, is paramount.
Finally, because for most people, income tax and social insurance are some the biggest annual expenditures, structuring a tax plan is essential in making sure you do not overpay taxes. It is a common misconception to think that tax planning is only for the wealthy. Their objective is different and their benefit, although huge in absolute terms is marginally smaller than those of the average taxpayer. To our observation, people who have more money than they will ever spend or be able to give away seek out the best and finest tax planning, and the worst tax planning or no tax planning at all is done by middle-class people who have middle-class virtues, those who have to work hard, save and sacrifice. Consequently, becoming aware of tax matters related to you and planning accordingly will save you money and help you meet your financial goals.