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New rules are a win-win for business owners and employees

The Finance Act 2022 has introduced some changes to Personal Retirement Savings Accounts (PRSAs) which will be of interest to employees and company directors. We understand that the jargon around pensions can be technical and a bit boring, so we’ve tried to summarise the changes as succinctly as possible.

Removal of benefit-in-kind

Change: Before the changes, an employer contribution paid to an employee’s PRSA was a Benefit in Kind (BIK) for income tax purposes for that employee. The employer contribution was treated as if it was made by the employee, in that it went against the age related limits and the €115,000 earnings limit. This has now changed.

Impact: Employees can now fund their personal pension contributions up to the maximum based on their age and as a percentage of €115k, without company contributions eating into this allowance. This frees up larger pension contributions, which can be facilitated by an employer contribution.

Enhanced Company Contributions

Change: The new legislation does not restrict or define the level of BIK free employer PRSA contribution by reference to the employee’s salary, work service, existing pensions or existing scheme funding.

Impact: This means that the level of your salary doesn’t not dictate how much of an employer contribution you can make to a PRSA. The rules around employer contributions to an executive (company) are complicated, so this new no nonsense approach to funding PRSAs is a welcome development for company directors and employees. For example, company directors are now free to choose the level of employer contributions they would like to make to a PRSA without reference to old funding rules.

Tax relief on employer contributions

Change: the Finance Act provides for tax relief on all employer PRSA contributions (without distinguishing between ordinary annual and special contributions) in the chargeable period in which the contribution is paid.

Impact: This means that a company director could decide to make a large pension contribution and it will be treated as an expense in the year it was made. There will be no need to spread the contribution forward, to be claimed against later years' profits.

Access to PRSA

Change: With the new funding regime in place, PRSAs will become more attractive to company directors if they are looking to access them before the age of sixty.

Impact: No requirement for 20% directors to dispose of any shareholding or terminate links to the business. This puts PRSAs in a more advantageous position relative to executive (company) pensions that require directors to sell their shareholding.

Disclaimer: This article contains general tax information. However it is not intended to provide formal taxation or commercial advice. We strongly recommend that specific formal advice be taken in relation to taxation issues before any steps are taken that may have taxation implications.