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The Finance Act was enacted on 15th December 2022, recent changes to pension
legislation in Ireland offer a huge opportunity to business owners to fund their pensions and extract cash from their business in a tax efficient manner. This has come into effect on the 1st January 2023.
Previously, companies were limited in how much they could contribute to an employee's pension by age related limits, service and salary.
If a company made a contribution to an employee's PRSA which exceeded these age related limits, the employee would be liable for BIK.
The new rules now allow companies to contribute as much as they want to an employee's PRSA without taking limits, service or salary into account.
This offers a massive opportunity to business owners who wish to fund pensions for
themselves, their spouse, or children.
Tax relief on all employer PRSA contributions can be claimed in the accounting period in
which it is paid. Under previous legislation, tax relief for 'special contributions' to pensions would have to be spread forward over five years. Employees will still need to consider the overall standard fund threshold of €2 million.
PRSA’s were overlooked in recent years in favour of executive pension plans or occupational pension schemes. This was because the PRSA offering was not as attractive. However, with the recent change, many business owners will utilise the PRSA to extract cash from their business in a tax efficient manner. Further good news is that the company can contribute to both an occupation pension and a PRSA for an employee.
Self-Employed, Sole Traders or Partnerships can pay a BIK free employer PRSA contribution for an employee and this can include adult children (over 18) who can be put onto the payroll. The contribution to a Revenue approved pension, such as a PRSA, is not subject to CAT even where there is family relationship between the parties. Therefore, contributions can be made to a child's pension, if they are in employment and over 18, without impacting the CAT exempt amount.