Reducing the Tax Bill Through a PRSA

With the Revenue Tax deadline approaching, the question arises of how to reduce the tax bill. Tax relief on pension contributions is still one of the best answers. With this in mind we have put together a breakdown of the recent legislative changes to the PRSA and key benefits to consider.  

PRSA and Employer Contributions

Before Jan 2023, any employer contributions to an employee’s PRSA was treated as Benefit in Kind (BIK), unless the employee had not already used up their personal contribution limits, after which they could facilitate non-BIK employer contributions. Now, since the 1st January 2023, there is no limit on employer contributions to an employee’s PRSA.

It’s very important though to note that the standard fund threshold of €2m still applies.

Whilst earlier in the year there were concerns over whether this would be available in the long run, Chapter 24.3 of the Revenue Manual has been updated to confirm the allowance of such PRSA contributions. This means that employees are free where possible to fund their full allowance of personal contributions but also receive an employer contribution and not be penalised with BIK.

Key Benefits of the PRSA

Some of the existing key benefits of PRSAs include:

1. There is no requirement to seek individual approval from Revenue on establishing a PRSA.

2. Any employee who is working and in receipt of Schedule E income can now receive unlimited employer contributions that are not subject to the normal maximum funding rules.

3. Under the PRSA there are no ordinary annual or special contributions. This means that contributions in a tax year can be claimed in full for the chargeable period and don’t need to be spread across multiple years.

4. The normal retirement age on a PRSA can be 75 giving more time before the benefits must be accessed.

5. Individuals don’t need to stay in employment to allow the benefits to remain in the PRSA until 75.

6. Early retirement allowable from age 50 in certain scenarios.

7. For 20% directors, no requirement to sell shareholding and completely sever ties with company.  They are only required to stop being a Schedule E employee and taking a salary.

8. The PRSA can be split into multiple PRSAs to stagger retirement and the amounts taken over time.

9. The full value of the PRSA is paid to the estate tax free, unlike an occupational pension that is subject to the four times final salary rule.

10. PRSAs are not subject to IORP II investment restrictions which limited unregulated investments to a maximum 50% of the scheme value and also restricted lending in pensions.

     

In our next blog we will look at a number of scenarios to consider when contributing to a PRSA. For further information, please speak to your financial advisor or email justask@independent-trustee.com.