The Finance Act 2022 was enacted on 15 December 2022. Amongst other changes to pensions, the Act confirmed that the Benefit in Kind for an employee which was previously triggered by an employer contribution to a PRSA has been removed. This came into effect on the 1st of January 2023.
What does this mean for Employees?
For ordinary employees saving for retirement in a Personal Retirement Savings Account (PRSA) this is a positive change. They will now be given the same tax treatment as occupational pension scheme members in relation to any employer contributions to their pension scheme. Previously where an employer paid into the PRSA, that employer contribution used up part of the employee’s own scope within their age-related limits. This is no longer the case. Employee contributions are still subject to the age-related contribution limits and the Earnings cap (currently €115,000)
Impact on Business Owners
Currently, the legislation does not place any upper limit on an employer contribution to a PRSA as would exist in occupational pension schemes under the Revenue guidance for Ordinary Annual and special contributions.
An employer can only make a contribution to a PRSA for an Employee. To be specific, that is someone who is registered as an employee of that entity and receiving a salary under Schedule E with PAYE taxation applied at source. However thereafter the level of salary paid, service to date, and level of pension benefits already accrued are not factored into the ability of that employer to contribute to the PRSA. There is no maximum funding calculation to determine the ability of the employer to contribute as would exist within occupational pension schemes.
The only limit now seems to relate to the lifetime pension fund limit (Standard fund threshold, currently €2M). The current interpretation is that these contributions would be allowed as an expense in the year in which they are paid (with no upper limit).
Impact on advice for Business Owners
Many company directors will already be funding for their retirement using an occupational pension scheme often referred to as an executive pension arrangement. For many, the funding rules within those schemes will allow more than enough scope for the contributions they wish to make for their retirement.
However, some company directors will see the new PRSA changes as advantageous. This is likely to be the case for those on low salaries with little or no scope to fund under an occupational pension scheme and those on larger salaries who have large profits which they want to extract now and obtain tax relief immediately. Another aspect of the PRSA that some directors may find attractive is the more simplistic approach to a death benefit claim for an active member as PRSA funds can be paid in full to the estate of the deceased member in the event of death whereas occupational pension schemes place restrictions on the maximum allowable lump sum payable with the residual funds being used to provide a pension via an Annuity or ARF for the spouse or dependents.
It is important the employer’s funding for an employee’s retirement using a PRSA should always ensure they are compliant with revenue salary sacrifice rules.
There is constant change in the pension arena and one that is certainly worth keeping a close eye on. It is expected that further legislative changes will be made this year for pensions in Ireland which may include further changes as recommended by the interdepartmental group looking at pension reform in Ireland.
For any further queries please contact us
Moore Financial consultants, Crossbridge Street, Dungarvan, Co. Waterford 058 86009