In this insight, our Private Client Manager, Sinead Cullen, helps to cut through the complexities and details the impact of the Finance Bill 2022 with regard to Personal Retirement Savings Accounts (PRSAs).
Recent changes in the Finance Act, made by way of the Finance Bill 2022, have made PRSAs more attractive to employers, employees, and companies. Traditionally, when considering pension funding, tax deductibility for companies and tax relief for employees meant that occupational pension type arrangements generally trumped.
This was because the employer pension contribution to a PRSA was treated as a BIK and as if it were an employee pension contribution subject to the individual age-related limits for tax relief.
Where an employee or individual contributes to their pension, tax relief is given at your marginal (highest) tax rate (subject to these age-related limits). For everyone, there is a maximum annual amount of earnings for which tax relief is given. This is €115,000 and it is adjusted from time to time by the Minister for Finance. There is no relief in respect of PRSI and the Universal Social Charge.
In contrast, employer contributions to an occupational scheme were, and are still, not subject to these age-related limits (only the individuals’ contributions are). The employee can receive contributions into their pension from their employer free of income, Universal Social Charge(USC), and Pay Related Social Insurance(PRSI), for the most part.
On the employer front, Revenue has specific maximum funding contribution limits for occupational pensions which calculate how much is deductible in the year the pension is paid and how much deductible can be spread forward.
Age-related earnings percentage limits
| Age | Percentage limit |
|---|---|
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 or over | 40% |
The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year. Source: Revenue Tax and Pensions
The Finance Act 2022 removed the section in the legislation which treated employer contributions to PRSA as employee contributions. The PRSA legislation does not have the maximum funding limits that the occupational scheme legislation does. Result - an employer could fund unlimited amounts into an employee’s pension!
With the current implementation of IORPII regulations, mass transfers to Master Trust arrangements, and increasing complexities of occupational schemes, many businesses are stepping back to compare an employer PRSA arrangement with an occupational scheme.
Above is the simplified view. While pension contributions paid by an employer in respect of an employee to a Revenue approved superannuation scheme shall not be regarded as a taxable benefit, how this payment comes about needs to be considered alongside other considerations. One key area to be cognisant of is salary sacrifice rules which were updated by Revenue in 2021.
Effectively these state that any arrangement under which:
- an employee waives an entitlement to remuneration, or
- accepts a reduction in remuneration,
In return for a corresponding payment by the employer into a pension scheme, is considered to be an application of the income earned by the employee, rather than an expense incurred by the employer.
If changing from occupational scheme structure to PRSA structure, clients need to be aware of the impact on any linked benefits such as death in service or pension term assurance. There is the option of funding into both types of structures to maximise tax free lump sum calculations. However you do need to be wary of building up retained benefits of the PRSA causing the occupational scheme to be overfunded.
Author
Sinead Cullen Private Client Manager, NFP Ireland
If you would like to discuss how we can help you and your employees navigate the pension landscape by providing tailored financial advice, get in touch with Sinead Cullen at: sinead.cullen@nfp.com or call our wealth management team on
+353 (1) 210 0210