The Finance Bill 2022

The Minister for Finance, Paschal Donohoe TD, published the Finance Bill 2022 last week.

The Finance Bill 2022, which runs to 93 sections and over 200 pages, implements the taxation changes announced on Budget Day as well as introducing some necessary administrative and technical changes to the tax code.

Pension - Changes

Pensions Tax Amendments

The Finance Bill 2022 provides for three main pension related amendments and these are shown below – but it is worth noting that nothing changes until the Finance Act comes into law, and there is no impact until the 2023 Tax year.

(1) Firstly, implementing a recommendation of the report of the Interdepartmental Pensions Reform and Taxation Group, the Finance Bill will provide that employer contributions on behalf of an employee to Personal Retirement Savings Account (PRSA) are no longer considered benefit-in-kind (BIK) for the employee. This brings the tax relief available to employees for employer contributions to a PRSA in line with that available for occupational pension schemes.

Comment

We were pleased to see that the Finance Bill 2022 confirmed the highly anticipated removal of the BIK charge levied on an Employer Contribution to a PRSA.

Assuming that this change makes its way through to the Finance Act 2022 this means that it will be possible for Employers to maximise pension funding using a PRSA arrangement – in the same way that it is possible for Employers to maximise pension funding using an Occupational Pension Scheme or a Master Trust.

Given the significant compliance requirements introduced in July 2022 by the Pensions Authority for One Member Arrangement (OMA’s), this is a very important issue for many Employers and Advisers as they review the pension options available to them and their clients as a result of IORPS II – and whether the pension provision should be in a Master Trust or standalone Defined Contribution Pension Scheme (which is subject to the rigours of IORPS II) or a PRSA arrangement (which is not subject to IORPS Compliance requirements).

(2) Secondly, the Bill introduces a new chapter of the TCA to provide for the tax treatment of contributions and out-payments from a new pension product – the Pan European Pension Product (PEPP).

This section aligns the PEPP with the tax treatment of PRSAs.

(3) Lastly, the Bill provides for an Irish tax resident to receive a tax free Retirement Lump sum of up to €200,000 from a foreign pension, in line with that available for Irish pension holders.

The Finance Bill 2022

The main Sections in the Finance Bill 2022 relating to pensions were as follows:

Section 18. Removal of BIK charge on Employer Contributions to a Personal Retirement Savings Account (PRSA)

This section amends section 118 of the TCA 1997 to exempt an employer contribution to an employee’s PRSA or PEPP from an income tax charge to BIK. This is a recommendation of the Inter-departmental Pensions Reform and Taxation Group (IDPRTG).

The section also deletes subsection (2) of section 787E TCA 1997, which treated both employer and employee contributions to a PRSA for the purposes of the tax relief as if they had been made by the employee. This is no longer required following the abolition of the BIK charge.

Section 16. Pan-European Personal Pension Product (PEPP)

This Section introduces a new Chapter 2D into Part 30 of the TCA 1997 that provides the taxation and relief rules for the pan-European Personal Pension Product (PEPP) which has been introduced as required under Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019. A PEPP will be a contract-based product between an individual and a PEPP provider in the form of an investment account. PEPPs are of a similar nature to the equivalent Irish product, the Personal Retirement Savings Accounts (PRSA).

Section 17. Pan-European Personal Pension Product (PEPP)

This section also deals with PEPP’s and contains a number of consequential amendments to the TCA 1997, the Capital Acquisition Tax Consolidation Act 2003 and the Stamp Duties Consolidation Act 1999 as a result of the insertion of a new Chapter 2D into the TCA 1997 which provides a framework for the Pan-European Personal Pension Product (PEPP.) These changes are being made to ensure that PEPP products are subject to the same taxation, relief, and administration provisions as set out for Personal Retirement Savings Accounts (PRSAs) and will be taxed according to the “exempt-exempt-taxed” or “E-E-T” system in common with other Irish pension products.

Section 15. Taxation of Retirement Lump Sums taken from foreign pension arrangements by Irish Residents

This Section introduces a new section 200A of the TCA 1997 on the treatment of lump sums drawn down from foreign pension arrangements. With effect from 1 January 2023, an individual who is paid a lump sum from a foreign pension arrangement, which is not subject to the provisions of section 790AA, may claim a tax-free exemption of €200,000 on the lump sum.

Amounts in excess of this tax-free limit are subject to tax in two stages. The portion between €200,000 and €500,000 is taxed at the standard rate of 20 per cent while any portion above that is taxed at the individual’s marginal rate of tax and USC. The standard rate charge is effectively ‘‘ringfenced’’ so that no reliefs, allowances or deductions may be set or made against that portion of a lump sum subject to that charge.

These limits are lifetime ones and as such, all lump sums from a foreign pension arrangement which are paid to a resident individual after 1 January 2023 will “use up” these limits, in addition to all prior lump sums subject to the provisions of section 790AA which were paid before or after 1 January 2023.

The portion of a lump sum which is charged at the standard or marginal rate of income tax is regarded as income of the individual for the tax year in which the lump sum is paid and accordingly, it is charged to tax under Case III of Schedule D and subject to income tax self-assessment provisions.

What was not included in the Finance Bill 2022?

Last year we saw the removal of the 15-year maximum restriction that prohibited pension scheme members transferring from an occupational pension scheme to a PRSA if they had more than 15 years’ service.

Regrettably there was no mention in the Finance Bill 2022 of the much-needed removal of the requirement for a Certificate Of Benefits Comparison COBC when transferring to a PRSA if the Scheme has not been wound-up.

This current COBC requirement is detailed in the Pensions Act (Section 113) and so we will hopefully see the COBC requirement removed by the Social Welfare and Pensions Bill due at the end of Nov/start of December 2022.