Personal Retirement Savings Accounts (PRSAs) Funding post Jan 2023
The following is a brief summary of the Finance Act as it relates to Pension Contributions in 2023.
An Employer contribution to a PRSA is no longer a Benefit in Kind (BIK) for an employee
Translation: That gets rid of an employer contribution to a PRSA being restricted by age related limits
It also means that employee contributions to PRSAs aren’t restricted by any employer contribution paid which was the case up to now – so also allows employees to contribute more and claim tax relief via a PRSA
However, the legislation does not restrict the level of BIK Free employer PRSA contributions in any way and these are not based on salary/service etc as we are used to in occupational pension schemes which are subject to Revenue maximum funding rules.
Translation: An employer can pay as much as they like into a PRSA without reference to either salary or service of the employee.
Tax relief on all employer PRSA contributions can be claimed in the accounting period in which it is paid unlike a special contribution to an occupational pension where the tax relief is spread forward over 5 years.
So now an employer can make any contribution to a PRSA they wish without limit.
Employees still need to consider the overall Standard Fund Threshold of €2 Million above which benefits are taxed at a punitive tax rate of 71%.
However, note that a PRSA can be "split" allowing a "good" fund of €2m and a "bad" fund above €2m. Note the bad fund can be deferred to age 75 and death before retirement is not a benefit crystalisation event for the purposes of applying the excess tax above the SFT.
Translation: just leave the excess to the family as a tax efficient inheritance
Therefore, not only can an employer now make an unlimited contribution to a PRSA they can also claim tax relief in the accounting period in which its paid
These rules are now hardwired in to current legislation
They apply to employees and 20% Directors. They also apply to 20% Directors of Investment Companies.
Self Employed Sole Traders or Partnerships can pay a BIK free employer PRSA contribution for an employee and this can include adult children (over 18) who can be put onto payroll.
The contribution to a Revenue approved pension, such as a PRSA, is not subject to CAT even where there is a family relationship between the parties. Therefore contributions can be made to a child's pension without impacting the CAT A exempt amounts.
Revenue's position on salary sacrifice still needs to be considered and should not be overlooked when making an employer contribution. Extra employer payments in addition to existing remuneration are allowable but an employee reducing their salary to make the payment will be caught by the salary sacrifice provisions.
An employer can contribute to an occupational scheme and a PRSA at the same time for the same employee.
Excessive remuneration
In dealing with excessive remuneration, the Revenue practice note covering remuneration to connected parties in a close company denies a tax deduction to the company – it does not prevent the payment being made i.e. no prohibition applies to payments to a PRSA.
The denial of relief for excessive remuneration takes place under the “wholly and exclusively” test in s81 – this section doesn’t apply to PRSA contributions.
The Revenue Pensions Manual makes no mention of restrictions applying under the excessive remuneration rules.
In fact in paragraph 24.3 it has been amended to now expressly state: “There is no limit on employer contributions to an employee’s PRSA. However, the overall standard fund threshold for an
individual of €2m applies.”
For the sake of completeness we also considered the position of a close company making a pension contribution to an adult child and the potential impact on CAT.
A Capital Acquisitions Tax (CAT) exemption applies to retirement benefits, redundancy payments or pension payments paid to you by your employer.
The exemption will not apply to a payment where:
1) you are related to your employer, or your employer is a private company in which you have control
2) the payment is not made under a Revenue approved scheme
and
3) Revenue decide that, in the circumstances of the case, the payment is excessive.
Where the employee is a relative of the employer or the employer is a private company controlled by the employee within the meaning of CATCA 2003 s 27 (see Chapter 6 Section6.5.7),
the exemption will not apply if the payment is not made under a Revenue approved scheme and is considered by the Revenue Commissioners to be excessive having regard to all the circumstances of the case.”
This analysis is based on our understanding of current Irish tax law and tax practices as commonly understood.
We accept that future changes in law as it is currently written are highly likely but the legislation as it is currently written does support unlimited payments.
However the law can be ambiguous and open to more than one interpretation. Many areas of law are not the subject matter of clarification by decisions of the Irish courts and accordingly, there is always a risk that the courts might, on future occasions or in the course of specific litigation, disagree with the interpretation placed on legislation by practitioners today.
In addition, there is every possibility that the Irish Revenue Commissioners might adopt a different interpretation of the law or might re-characterise a transaction which in their opinion constitutes a tax avoidance transaction.
Everlake
