employer PRSA contributions

Important changes to the tax treatment of employer PRSA contributions

Employer PRSA contributions are happening – here is all you need to know. 

The Finance Act 2022 delivered one of the biggest changes to pensions in some time.

This shift was the removal of the BIK charge on employer PRSA contributions which came into effect on January 1st of this year.

Over the past few years, the Irish government has been focusing on pension reform. Much of this framework was detailed in the ‘Roadmap for Pension Reform 2018 – 2023 and in the Interdepartmental Pension Reform and Taxation Group’s supplementary paper.

The ultimate goal of all this is the simplification and consolidation of pensions by making pensions more attractive to savers, easier to understand and subsequently increasing private pension coverage.

Facilitating this has meant the removal of many of the anomalies which exist within the various pension products, the latest of which has been the removal of the BIK charge on employer PRSA contributions.

What the pension changes mean for you

This most recent change will allow pension savers to make much larger tax-free employer PRSA contributions than was previously permitted.

Before this business owners/directors were restricted as to the level of employer contributions to occupational pension schemes. This was due to the impact of their traditionally lower salaries on their scheme funding figures. These individuals can now extract cash tax-free from their companies into PRSAs by way of employer pension contributions with no upper limit currently in place on the level of contributions which can be made.

Consideration should be given for cashflow situations and to the long-term plans for the company. Once cash has been contributed to the pension, it cannot be reversed and for business exit strategies, it’s important that CGT/CAT reliefs are not adversely impacted.

Furthermore, care should be taken when considering the appropriate amount of contributions to PRSAs. Typically owners/directors can direct their own remuneration packages, which includes pension. However, for other employees or family members employed in the business it may not be as straightforward. Revenue guidance on this sets out that the level of remuneration should be appropriate to the role carried out in the business by the individual.

The risk being that a large pension contribution could be viewed by Revenue as excessive or fall foul of salary sacrifice rules. It could then be taxed as a payment from the company or a BIK for the individual.

A second group who will also stand to benefit from the change to PRSAs are directors of investment companies. Under current Revenue rules, they are not permitted to join employer pension schemes and up until this year could not extract company cash into pensions. There is no such prohibition on directors of investment companies setting up a PRSA, however contributions were limited due to the BIK charge.

What happens next

This is the first step by government to increase private pension coverage in this country.

It will be a welcome change, as it will benefit certain groups of pension savers and allow them to maximise on their contributions.

Nevertheless, it is imperative that any pension funding strategy is aligned with the individual’s financial plans for the future, their retirement strategy and their exit plans for the business.

Alternative solutions and pensions saving options should also be considered.

If you have any questions about the above, please contact us at Hyland Johnson Keane on (021) 480 6316

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