PRSAs - Pension Planning - Finance Act 2022

Finance Act (FA) 2022 changes to the taxation of Personal Retirement Savings Accounts (PRSAs) is of particular relevance for business owners.

Previously companies were limited in how much they could contribute to employee’s/Director’s PRSAs. However, with no restriction on the level of employer contributions from 1 January 2023, the FA 2022 amendments, provide opportunities for business owners to extract wealth from their companies’ tax efficiently through pension planning.

The amendments provide for increased pension funding for Directors and employees. Pension planning using PRSAs could also be considered for spouses and family members (adult children over aged 18 years) who are employed by the family company (or who are employed by sole traders or partnerships).

?The key FA 2022 amendments are:

Benefit in Kind

From 1 January 2023, an employer contribution to a PRSA is no longer a Benefit in Kind (BIK) for an employee (prior to that, contributions paid by employers into an employee’s PRSA were treated as BIKs for income tax purposes).

Therefore, an employer can make any amount (i.e. no limit) of contributions to an employee’s PRSA (with no service/salary criteria). The employer can claim tax relief for the total employer pension contributions in the accounting period in which they are paid unlike an occupational pension, where these may be considered special contributions and therefore tax relief is spread forward over 5 years.

Limits on tax efficient contributions

Prior to FA 2022, the relevant tax legislation deemed an employer PRSA contribution to be an employee PRSA contribution for income tax relief purposes – this meant that the age related percentage limits and the €115,000 earnings cap came into play.

FA 2022 removes the treatment of the employer contribution as an employee contribution which means the employee can now also contribute more into PRSA (subject to the normal salary and age related limits).

Employees still need to consider the €2M Standard Fund Threshold (SFT) -?there is a penal tax rate applicable to the excess (however, it may be possible split a retirement fund into multiple PRSAs).

Salary sacrifices will also need to be considered as the level of contractual remunerations foregone in return for the employer PRSA contribution will be subject to a BIK charge.

Key take aways

The 2022 Finance Act changes to PRSA Pension Contributions may now enable tax planning opportunities for a wide range of business owners. They could be used as a tool in tax efficiently planning Directors/shareholders retirements/exit from the business (and in exit planning).?

?If the above is of interest to you, please contact any member of our team Tom Mahon Olga Miller David Kehoe Anthony O'Callaghan Sinead Scanlan Shauna Mckay

#PRSA #pension #wealthplanning #retirementplanning