Finance Act 2022 Employer Contributions to PRSA’s

Finance Act 2022 Employer Contributions to PRSAs. The Finance Act 2022 was enacted on 15 December 2022.  Amongst other changes to pensions, the Act confirmed that
the Benefit in Kind for an employee, which was previously triggered by an employer contribution to a PRSA, has been
removed. This has come into effect on the 1 January 2023.

Impact for Employees

For ordinary employees saving for retirement in a Personal Retirement Savings Account (PRSA) this is a positive change.
They will now be given the same tax treatment as occupational pension scheme members in relation to any employer
contributions to their pension scheme. Previously where an employer paid into the PRSA, that employer contribution used
up part of the employees own scope within their age related limits to pension their income. This is no longer the case.
Employee contributions are still subject to the age-related contribution limits and the Earnings Cap (currently €115,000).

Impact for Business Owners

The changes have led to much discussion as to what it means for employer contributions to a PRSA, particularly in terms of
how they are controlled. Currently our interpretation is that the legislation does not place any upper limit on an employer
contribution to a PRSA as would exist in occupational pension schemes under the Revenue guidance for Ordinary Annual and
Special Contributions.

An employer can only make a contribution to a PRSA for an Employee. To be specific, that is someone who is registered as
an employee of that entity and receiving a salary under Schedule E with PAYE Taxation applied at source. However thereafter the
level of salary paid, service to date and level of pension benefits already accrued are not factored into the ability of that employer
to contribute to the PRSA. There is no maximum funding calculation to determine the ability of the employer to contribute
as would exist within occupational pension schemes.

The only limits now seem to relate to the Lifetime Pension Fund Limit (Standard Fund Threshold, currently €2M) – and the
Employers capacity to fund a significant contribution and the profits/corresponding tax that the Employer is paying.

We have no specific guidance in the Pensions Manual as to how an employer would seek tax relief on such a contribution (as we
do for occupational pension scheme in Chapters 4 & 5 of the Revenue Pensions Manual), however the current interpretation
by the industry of the legislation is that it appears these contributions will be allowed as an expense in the year in which
they are paid (with no upper limit).

Impact on Advice for Business Owners

Many company directors will already be funding for their retirement using an occupational pension scheme often referred
to as an executive pension arrangement. For many the funding rules within those schemes will allow more than enough scope for
the contributions they wish to make for their retirement.

However some company directors will see the new PRSA changes as advantageous. This is likely to be the case for
those on low salaries with little or no scope to fund under an occupational pension scheme and also those on larger salaries
who have large profits which they want to extract now and obtain tax relief immediately. Another aspect of the PRSA which some
directors may find attractive is the more simplistic approach to a death benefit claim for an active member as PRSA funds can be
paid in full to the estate of the deceased member in the event of death whereas occupational pension schemes place restrictions
on the maximum allowable lump sum payable with residual funds being used to provide a pension via an Annuity or purchase an
Approved Retirement Fund (ARF) for a spouse or dependents. As with occupational pension schemes, employers funding for an
employees retirement using a PRSA should always ensure they are compliant with Revenue’s Salary Sacrifice rules.

20% Directors of Investment Companies

The Revenue have been quite clear that a 20% director of a company that is treated for tax purposes as an investment
company, could not be accepted into membership of an occupational scheme in relation to that employment. That
continues to be the case for executive pension arrangements however no such restriction currently exists in respect of
PRSA’s. As a result the current interpretation within the industry is that where a 20% director of an investment company is
registered as an employee of that company and receiving a salary under Schedule E then the employer could make an
employer contribution to a PRSA for the benefit of that director.

Further Revenue guidance and
Legislative Changes

These new legislative changes mean that the current guidance in the Pensions Manual
on the administration of PRSAs is now out of date. Therefore, caution needs to be
exercised around advising on this issue as we expect the manual to be updated soon to
include further guidance on the operation of PRSAs and how these new rules will interact
with other Pension Arrangements.

It’s also expected that further legislative changes will be made this year for pensions
in Ireland which may include further changes as recommended by the Interdepartmental
group looking at pension reform in Ireland.

As a result, this is an area of retirement planning which could be subject to further
changes and will therefore need to be closely monitored.

 

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Zurich Life Assurance plc
Zurich House, Frascati Road, Blackrock, Co. Dublin, Ireland.
Telephone: 01 283 1301 Fax: 01 283 1578 Website: www.zurich.ie
Zurich Life Assurance plc is regulated by the Central Bank of Ireland.
The information contained herein is based on Zurich Life’s understanding of current
Revenue practice as at January 2023 and may change in the future.
Intended for distribution within the Republic of Ireland.