Increase salary in order to increase pension funding

FarmFly

Registered User
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Does it make sense to increase my salary (have my own company) in order to increase my pension contributions. I understand PRSI & USC would still need to be paid, but on the other hand, the additional income is income tax free, and is a cost to the company resulting in reduced company profits resulting in less corporation tax. Would it be an efficient way of extracting funds from the company?
 
If you increase your salary (amongst other things) you increase the scope of your contribution potential.

There are a number of other variables to consider also but you can calculate your own numbers here as a company director and try out as many scenarios as you like.

Kevin
http://www.thepensionstore.ie (www.thepensionstore.ie)
 
Thanks for the reply, but my question is a general one - i.e. if I increased my salary by e.g. 10,000 and put it all towards my pension, what would the net tax be? It seems that this would be quite efficient as PRSI & USC would be similar to corporation tax (which you would pay anyway if you did nothing). The rest is in the pension!
 
Assuming you are on the PAYE system, you would need to consider the age related maximum Employee Contribution Amounts.

The max pension contributions you can make are limited to a % of your total PAYE income.
Check here:

Assuming you are aware of these limits,and are within those limits to get PAYE free contributions, a salary increase of 10k, being put into a penaion scheme, will only be subject to Employee PRSI & Employee USC at your marginal (highest) USC rate.
Typically, a salary increase is subject to 4% PRSI, and 8% USC if your total PAYE income exceeds 70k annually.

So putting in all of a 10k salary increase, to pension, will reduce your nett pay by €1.200 annually. (USC & PRSI apply, of a combined 12%)

However, there are other options, if you setup a Company Scheme, where the Company contributions made, have no PRSI, USC impacts on your nett pay, but company contributions also have restrictions, allthough these are generous

Some professional advice would be needed to setup such a Company pension scheme
 
I would agree with everything that fayf says above. If you own your own company then you have two options for the type of pension vehicle into which your company can contribute towards your pension - PRSA and Occupational Pension Scheme (a.k.a. Company pension scheme, Executive pension scheme etc.) The Occupational Pension Scheme (OPS) allows you to avoid PRSI and USC on company contributions; the PRSA does not. The OPS allows larger employer contributions than a PRSA. In many cases the charges on an OPS can be lower than on a PRSA. There are more options as to how you can withdraw your benefits at retirement with an OPS than with a PRSA. Although individual circumstances need to be looked at before making a choice, in many cases an OPS is more suitable than a PRSA for a company owner.

Regards,

Liam
www.ferga.com
 
Have you done a pension funding check? There may be scope to make large pension contributions based on back service that isn't already funding for.

When running your own business, it is common for directors not to contribute to pensions at all in the first few years while they manage cashflows. Or you may not be contributing up to the revenue maximum every year.

So I would check that you are currently at the maximum revenue funding amount at your current salary before thinking about increasing salary purely for pension purposes.


Steven
www.bluewaterfp.ie
 
Again, thanks for replies.
I am funded to the max myself, but my wife who also works in the business and is a director has scope for a salary increase, thus an increase in pension contributions. We have a personal pension mortgage (used to buy the company), and the pension will pay some of the mortgage back. The pension route does seem like a reasonably efficient way of getting funds out of a company and into a personal structure.
 
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