Employer Pension Contribution Tax implications

E

Eireog007

Registered User
Messages
161
Considering a new job offer and planning on negotiating an additional benefits package, so if an employer makes pension contributions to an occupational scheme that’s fully deductible from their corporation tax what are the implications in relation to a PRSA?

In this scenario I would be keeping the total contributions by both myself and the employer to the age related limits.

I’m just curious what the companies out lay would be as opposed to asking for an addition
 
Eireog007 said:
Considering a new job offer and planning on negotiating an additional benefits package, so if an employer makes pension contributions to an occupational scheme that’s fully deductible from their corporation tax what are the implications in relation to a PRSA?

In this scenario I would be keeping the total contributions by both myself and the employer to the age related limits.

I’m just curious what the companies out lay would be as opposed to asking for an addition
Click to expand...

The employer contributions are not restricted by age related or income limits
 
EmmDee said:
The employer contributions are not restricted by age related or income limits
Click to expand...

What I was wondering was if by staying below the age restrictions when including the employer contribution does this allow them to claim this back against their corporation tax such as in the occupational scheme.

I was wondering this as once it stays below the age restriction it’s not considered a BIK for the employee.
 
Eireog007 said:
What I was wondering was if by staying below the age restrictions when including the employer contribution does this allow them to claim this back against their corporation tax such as in the occupational scheme.

I was wondering this as once it stays below the age restriction it’s not considered a BIK for the employee.
Click to expand...

Hmmm - I might be misunderstanding. The age and income related contribution limits purely relate to the employee contribution. The employer contribution can be anything - I assume it is treated the same way for corporation tax purposes irrespective of whether it is 1% or 100% of your salary.

I don't believe any of the employer contribution has any BIK implication for the employee - my company's contribution is multiples of the age / income restrictions for my contribution. I contribute up to the max and the company contributes over 2x of mine. There is no BIK
 
"Employer contributions to an approved occupational pension scheme (OPS) on behalf of employees are a not a benefit in kind in their hands. Contributions to an employee’s Personal Retirement Savings Account (PRSA) are a benefit in kind.

However, the benefit is taxable only where the aggregate of employer’s and employee’s PRSA contributions exceed the employee’s age-related limit.

You should not deduct tax under Pay As You Earn (PAYE) or Pay Related Social Insurance (PRSI) from your employer contributions if the scheme is either an OPS or a PRSA.

From 1 January 2016, Universal Social Charge (USC) is no longer payable on contributions you make to an employee's PRSA."


https://www.revenue.ie/en/employing...ers/other-benefits/pension-contributions.aspx
 
If the total contribution (employer +employee) is below the age related limits then a PRSA will work. If however you manage to get the Employer to make a more generous contribution (such that the combined contribution exceeds the age related limits) then setting up an Executive Pension (an Occupational Pension) would be better. In that case the overall contribution limits are much higher.
 
Easel said:
"Employer contributions to an approved occupational pension scheme (OPS) on behalf of employees are a not a benefit in kind in their hands. Contributions to an employee’s Personal Retirement Savings Account (PRSA) are a benefit in kind.

However, the benefit is taxable only where the aggregate of employer’s and employee’s PRSA contributions exceed the employee’s age-related limit.

You should not deduct tax under Pay As You Earn (PAYE) or Pay Related Social Insurance (PRSI) from your employer contributions if the scheme is either an OPS or a PRSA.

From 1 January 2016, Universal Social Charge (USC) is no longer payable on contributions you make to an employee's PRSA."


https://www.revenue.ie/en/employing...ers/other-benefits/pension-contributions.aspx
Click to expand...

Thanks Easel that’s pretty much what I had researched so was starting to get a little confused there, so just for my own clarification if an employer contributes €500 towards an occupational pension scheme for an employee the net cost to the company is €0 as they deduct this from their corporation tax bill but in the case of an employee’s personal PRSA plan that €500 contribution would cost the employer the €500 as they get no tax relief? Or am I still confused?
 
An Employer Pension contribution (whether into a PRSA or an Executive Pension) is deductible as a business expense, just like salaries and other business costs. So if the Co. pay 12.5% Corporation Tax, then the net cost is 87.5%.
The individual does not pay BIK on the Employer contribution.
 
Eireog007 said:
...so just for my own clarification if an employer contributes €500 towards an occupational pension scheme for an employee the net cost to the company is €0 as they deduct this from their corporation tax bill... Or am I still confused?
Click to expand...

I think you're still a bit confused. Let's say my company has €1,000 in its bank account.

  • If I do nothing with this €1,000 and leave it sitting in the company bank account, I'll pay Corporation Tax on it. Assuming 12.5% Corporation Tax rate, I'll be left with €875.
  • If I decide to buy €1,000 worth of office stationery for my business, I'll pay no corporation tax and I'll have €1,000 worth of stationery.
  • If I decide to give my employee a bonus of €1,000 into their salary, it will cost me extra as I'll also have to pay Employer PRSI on top of the €1,000. My employee won't get €1,000 as they'll pay Income Tax, Employee PRSI and USC. If they're paying high rate of everything they'll see about €500.
  • If I put the €1,000 into an Occupational Pension Scheme as an employer contribution for my employee, I won't pay Employer PRSI so it will cost me the €1,000 - no more; no less. My employee will have an extra €1,000 in their pension fund.
Does that help?
 
LDFerguson said:
I think you're still a bit confused. Let's say my company has €1,000 in its bank account.

  • If I do nothing with this €1,000 and leave it sitting in the company bank account, I'll pay Corporation Tax on it. Assuming 12.5% Corporation Tax rate, I'll be left with €875.
  • If I decide to buy €1,000 worth of office stationery for my business, I'll pay no corporation tax and I'll have €1,000 worth of stationery.
  • If I decide to give my employee a bonus of €1,000 into their salary, it will cost me extra as I'll also have to pay Employer PRSI on top of the €1,000. My employee won't get €1,000 as they'll pay Income Tax, Employee PRSI and USC. If they're paying high rate of everything they'll see about €500.
  • If I put the €1,000 into an Occupational Pension Scheme as an employer contribution for my employee, I won't pay Employer PRSI so it will cost me the €1,000 - no more; no less. My employee will have an extra €1,000 in their pension fund.
Does that help?
Click to expand...


It does to a certain extent yes thank you, I guess what’s confusing me a lots is the somewhat contradictory information online, like this from pensionauthority.ie

“Employer contributions to pension arrangements are fully deductible for corporation tax purposes up to certain limits”
 
It’s probably too detailed for this thread, but “ordinary” contributions as defined are fully deductible upfront. “Special” contributions as defined need to be spread by the company over up to 5 years. Very loosely, special contributions are “catch-up” contributions for previously unfunded or underfunded pensionable service.
 
Gordon Gekko said:
It’s probably too detailed for this thread, but “ordinary” contributions as defined are fully deductible upfront. “Special” contributions as defined need to be spread by the company over up to 5 years. Very loosely, special contributions are “catch-up” contributions for previously unfunded or underfunded pensionable service.
Click to expand...

Thanks Gordon that’s also quite helpful, that’s sort of the information I was looking for.

My basic query which I probably didn’t explain properly was whether or not it’s more beneficial for a company to provide regular pension contributions to an employee than say an additional amount in salary. All this is for the purposes of negotiation of a package for a new job.

From what Gordon has said it would seem so as they are fully deductible as opposed to the increased salary which is only deductible at the standard corporation rate. This also seems to depend on the type of pension plan being contributed to, at least from the information I’ve found online.
 
I think you are confused. If the Employer gives you an increase in salary OR pays that same amount into a Pension, it has the same impact in terms of Corporation Tax . Both are treated as expenses and thus reduce Profit before Corporation Tax is calculated.
If they pay it as Salary however, they must also pay PRSI . So the total cost to the Employer is slightly higher.
 
Conan said:
I think you are confused. If the Employer gives you an increase in salary OR pays that same amount into a Pension, it has the same impact in terms of Corporation Tax . Both are treated as expenses and thus reduce Profit before Corporation Tax is calculated.
If they pay it as Salary however, they must also pay PRSI . So the total cost to the Employer is slightly higher.
Click to expand...

Yeah I’m get turned around quite a bit on it but that’s also a helpful clarification.
 
Eireog007 said:
Yeah I’m get turned around quite a bit on it but that’s also a helpful clarification.
Click to expand...

I think you're getting hung up on the corporation tax benefit to the company. It's a bit of a red herring.

The company pays tax on profits - revenue less legitimate expenses. Salary and pension contributions are both legitimate expenses so it really shouldn't make a difference to them (other than the PRSI difference noted by Conan - but leave that to one side)

The real benefit is to you. So if you're negotiating with them, the argument you should use is that by directing a more significant portion of total comp into pension rather than salary, they get an employee who is getting a bigger return for the same cost to them - therefore happier and more likely to stay. It may also benefit them the PRSI on the differential (but that won't be a big factor I doubt)
 
By the sounds of it, you are thinking of asking for a bigger pension contribution from the employer and your argument is going to be 'it will cost you nothing as you can write if off against corporation tax'....As explained above, you can't use that argument. Forget about the impact to the Employers P&L. The employer will more than likely have a budget that they need to stick to. That is what is going to drive their decision to yes or no. Not a calculation based on corporation tax or the differences between a salary increase or pension contribution.
 
Eireog007 said:
It does to a certain extent yes thank you, I guess what’s confusing me a lots is the somewhat contradictory information online, like this from pensionauthority.ie

“Employer contributions to pension arrangements are fully deductible for corporation tax purposes up to certain limits”
Click to expand...

So are salaries or any allowable business expense like buying office stationery.

Try not to get too hung up on the term "deductible". A pension contribution, while deductible for tax purposes still costs the employer. Being "deductible" just means that they don't have to pay tax on that amount. So going back to my example of €1,000. If an employer holds on to that €1,000, they'll pay 12.5% Corporation Tax on it and so will pay €125 tax. But they'll retain the other €875 for themselves. If they pay the €1,000 into an employee's pension, they will save on the €125 that they would otherwise pay in Corporation Tax. But it still costs them €1,000.
 
You must log in or register to reply here.
Back
Top