Current Situation: Before the Bill
Right now, employer contributions to PRSAs are not subject to BIK, meaning employees are not taxed on contributions made by their employer. On top of that, there’s no limit on how much an employer can contribute without triggering a BIK charge, which has made this setup a popular option for building retirement savings tax-free.
However, while employer contributions have enjoyed this flexibility, employees still need to stay within the “Standard Fund Threshold (SFT)” — the cap on the total amount of tax-relieved pension savings a person can accumulate over their lifetime, currently set at €2 million. Exceed that, and hefty taxes apply.
The Changes Coming
The bill introduces a new cap on how much an employer can contribute to a PRSA without triggering BIK. The limit? 100% of the employee’s salary. Anything above that will be treated as a taxable benefit-in-kind, meaning it’ll be taxed as regular income for the employee.
For example, if an employee earns €30,000 a year, their employer can contribute up to €30,000 to their PRSA without any BIK. Anything beyond that would be subject to income tax.
Additionally, employer tax deductions for PRSA contributions will also be limited to this 100% salary cap. This aligns employer contributions with tax relief limits on employee contributions, creating more consistency across the system.
The Contradiction: Is This Really Simplifying Pensions?
The government's stated goal with pension reform has been to simplify the pension system in Ireland. However, this new cap on employer PRSA contributions contradicts that objective. Introducing a limit tied to an employee’s salary, along with the associated tax implications, adds another layer of complexity.
Instead of making pension planning easier, the new rules may require employers and employees to engage in more detailed financial planning to avoid breaching limits and triggering unexpected tax liabilities. In effect, the rules complicate matters further rather than simplifying the landscape as promised.
What Does This Mean for Employers and Employees?
For employers, these changes mean there’s now a limit on how much they can contribute to an employee’s PRSA without creating a tax burden for that employee. This might prompt companies to rethink their contribution strategies to ensure they stay within the new limits.
For employees, especially low earners, the changes make it difficult to accumulate retirement funds. Alternative strategies, such as an occupational pension scheme, may be needed to make the most of pension contributions without triggering tax charges. This option, however, carries Revenue restrictions regarding salary and service levels, and tax relief for employers on large contributions may need to be spread.
In Summary
The proposed changes to BIK treatment of employer PRSA contributions are significant and restrictive. While the aim of pension reform in Ireland has been to simplify the system, this new development seems to create more complexity, especially for business owners. The anticipated effective date is 1st January 2025 and so, there is a limited timeframe for directors to take action.
Navigating these new rules will require careful planning to maintain the tax advantages PRSAs offer, all while staying within the newly introduced limits.
