As a consequence of the Finance Bill 2022, business owners and employees alike are being positively impacted by changes to PRSA contribution thresholds as the benefit-in-kind categorisation is removed on employer pension contributions. Previously pension contributions submitted by an employer were limited by the employee’s age, service and salary. These employer contributions used up part of the employee’s own scope for funding their pension (as determined by the employee’s age and earnings), and any employer pension contribution in excess of these limits would be treated as an employee BIK. Not only has the employer contribution stopped impacting on the employee’s personal threshold, but all caps on contributions of the employer have been lifted. This will have positive connotations for the employee and the business owner.
Saving for retirement can be a long road, and while there are great tax advantages to maxing on your pension contributions the restrictions on PRSA’s meant that employer occupational pension schemes and executive plans were more attractive. Now the PRSA is an equally attractive product and will be a very effective method of extracting wealth from a business. The employee will still be subject to the standard Lifetime Pension Fund Limit € 2 million fund threshold on pension contributions which are accessed, however, their employee contribution threshold will no longer be impacted by the employer’s contribution.
A business owner who is both the employer and the employee will be in a very positive position as they can fund their own pension and the pensions of their employees without restriction upto a lifetime limit of €2 million. An employee is anyone receiving a salary under Schedule E with PAYE taxation applied at source, including themselves, a spouse, or an adult child aged over 18. A PRSA contribution is not liable for Inheritance Tax (i.e. CAT ) so it is possible to fund a child’s pension as long as they are in Schedule E employment with the company. This means that the PRSA will be a very useful means for a business owner to extract wealth from their business in the most tax-efficient manner. Tax relief on PRSA contributions made by the employer is allowable as a tax deductible expense within the period in which it was paid, and there is no upward limit on this.
Although there is a Lifetime Pension Fund Limit of € 2 million which is not to say that is the full amount which a person can actually fund into a pension. It is the most that an individual can access in their lifetime. Anything above this € 2 million could be filtered into a second PRSA which can remain untouched and as an inheritance for their estate. Similarly, it is possible for an individual to divide their large PRSA into smaller ones which can be accessed separately instead of accessing the entire pot at one time. It is always important to seek financial advice to ensure you are carefully planning for the future. Another advantage of the PRSA is the death benefit, as the full value of the fund is paid to the estate. Under existing legislation, the death benefit on existing active executive pensions is limited to 4x final remuneration plus a refund of member defined contribution plan, and the residual is used to buy an ARF or annuity. Full payment to the estate is also made on deferred members.
All information is accurate at the time of writing but subject to change. For more information on PRSA’s, retirement provision or wealth management and extraction please don’t hesitate to check out our website or get in contact by phone 061 337578 or email info@olliemoranfs.com
