Many changes have occurred in the pensions landscape in recent years, but Finance Act 2022 introduced significant changes specifically about employer contributions to employee PRSAs.
Finance Act 2022 amended the rules which applied to the treatment of contributions by employers to employees and directors' Personal Retirement Savings Accounts (PRSAs). Firstly, it removed the benefit-in-kind charge, which had been applicable where employers contributed to PRSAs. Secondly, the contribution can be made without considering the age-related tax relief contribution limits. Therefore, it does not impact the employee's ability to make personal contributions on which they can claim tax relief.
Changes to PRSAs from 1 January 2023
The changes mean that, from 1 January 2023, there is additional scope for employers and employees to make pension contributions to PRSAs tax-efficiently.
An employer can contribute to a PRSA:
Without taking into account the age-related tax relief contribution limits. E.g., if an employee is aged between 40-49, they can only claim tax relief on a personal pension contribution of 25% of €115,000.
The employer contribution is no longer treated as being subject to the benefit-in-kind rules and thus subject to income tax.
An employer can only make a contribution on behalf of an employee registered as an employee for payroll purposes and receiving a salary. Still, factors such as the level of service, the salary paid, and the pensions benefits paid to date are no longer relevant in determining the quantum of the contribution which can be made.
Revenue's Pension Manual Chapter 24, dealing with PRSA, was updated in March 2023 to reflect the changes. It confirms that there is no limit on employer contributions to an employee's PRSA. However, the overall standard personal fund threshold for an individual of €2m still applies as the only limitation on PRSA contributions.
Traditionally, another structure for pension planning called Occupational Pension Schemes would have been the most tax-efficient way in which employers could reward employees and directors by making pension contributions on their behalf. PRSAs have more flexibility than Occupational Schemes regarding funding, where investments within the scheme can be made, whether trustees are required, what vesting requirements exist, and what options exist on retirement and death. These recent changes mean that PRSAs are considered more attractive for business owners, directors and directors of investment companies.
Pension advisors have different opinions to date on how far employers can go in terms of making pension contributions to employees and directors PRSA's since the changes were introduced. No legislative provision places a specific cap on what the contributions can be, so it is open to interpretation as to how much is considered an excessive contribution. The overall standard fund threshold for an individual of €2m obviously applies. However, how quickly an employer can fund an employee's pension to reach that key number since the changes were introduced is open to interpretation and debate. Regard must be had to the employer's funding ability and the deductibility of pension contributions from a tax perspective.
It is important to be aware of the changes that now allow employers more opportunity and flexibility to reward employees and directors by making pension contributions to their PRSAs.
While Mazars do not provide pension advice, we would be happy to work with the pension advisers of employers who wish to avail themselves of the increased funding opportunities.
If you have any questions about the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:
Mazars was delighted to participate in the 2023 annual tax advisors survey with the Business Plus, which was published in November. Frank Green, Head of Tax, responds to editor Nick Mulcahy’s questions.