PRSA 2023 changes: The impact on the pensions landscape

The Finance Act 2022 introduced significant changes to PRSAs. One change is that now the benefit in kind for an employee, which was previously triggered by an employer contribution to a PRSA, has been removed. So, what does this mean and what are the benefits of the change?

What is changing for PRSAs?

From the 1^st January 2023:

• An employer can contribute to an employee PRSA without taking into account the age-related tax relief contribution limits.
• Employer contributions to a PRSA are no longer treated as benefit in kind (BIK).
• There is no limit on employer contributions to an employee’s PRSA. However, the overall standard fund threshold for an individual of €2m applies.

Prior to 1^st January 2023:

• Employer pension contributions to an employee PRSA were calculated based on the age-related percentage limit for tax relief on pension contributions.
• 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 employee needed to consider the overall standard fund threshold of €2m.

Who can benefit from the recent changes to the pension legislation?

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 employer’s capacity to fund a significant contribution and the profits/corresponding tax that the employer is paying. We have no specific guidance as to how an employer would seek tax relief on such a contribution, 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).

How can business owners and employees benefit from these changes?

• Companies can contribute as much as they want to an employee PRSA without age related limits, while still considering the overall standard fund threshold of €2m.
• PRSAs may be attractive as business owners can use a PRSA to fund for their retirement; PRSAs should be a tax efficient way to accumulate these funds.
• It allows business owners, who may not be able to afford pension contributions in certain years, to maximise their tax relief in the years they can.
• The company can contribute to both an occupational pension and a PRSA for an employee.
• This change makes PRSAs an attractive option to executive pension plans and occupational pension schemes.

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as at 1st May 2023 and may change in the future.