PRSA rule change presents business owners with huge opportunity
Darach Honan of Honan Financial Services outlines recent changes to pension legislation in Ireland that offer a huge opportunity to business owners to fund their pensions and extract cash from their business in a tax efficient manner.
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 employees 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 employees 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 pension would have to be spread forward over five years.
Employees will still need to consider the overall standard fund threshold of €2 million. However, if an individual holds a PRSA to the value of €4 million. They can split this fund into two. They can then access one PRSA and use it to fund their lifestyle in retirement, while leaving the second fund untouched, growing tax free, as an inheritance for their estate.
PRSAs 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 this recent tweak, 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 occupational 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 payroll. The contribution to a Revenue approved pension, such as a PRSA, is not subject to CAT even where there is a family relationship between the parties. Therefore, contributions can be made to a child’s pension, if they are employment and over 18, without impacting the CAT A exempt amounts.
For more information on how to utilise this change in legislation to your advantage, call Darach on 087-1277155 or email darach@honanfs.com
