Since Revenue updated the rules around employer PRSA contributions at the start of this year, many businesses and company leaders are seeking clarity on how to implement them . In particular, how does the new 100% limit work – and what happens when it’s exceeded?
Here’s what you need to know.
A quick recap on the rules for an Employer PRSA
Under laws tweaked last year, an employer can contribute up to 100% of an employee’s emoluments (that is, their earnings from that employer) to a PRSA each year. Previously, there was no limit. The new limit applies on a calendar year basis – in line with the tax year.
If contributions go above this amount, the excess is treated as a benefit-in-kind (BIK) for the employee. In that case, the employee will pay tax on it as if they had received the amount of the excess as a salary payment.
So how does this play out in real-world scenarios? We’re starting to find out, as businesses look to put the new rules into practice.
There are three main aspects to consider.
1. BIK is assessed at year-end, not when the contribution is made
One of the most common questions we’ve been asked is: what if an employer contributes early in the year, before the director or employee has earned the full amount?
Many company owners pay themselves fairly low amounts monthly, and draw a bonus near the end of the year depending on business performance. It’s possible therefore for your company pension payment each month to be higher than your monthly salary. That could risk a benefit-in-kind charge.
Revenue has clarified that the BIK calculation is made at the end of the tax year, not when the contribution is paid. So the employer should look at total PRSA contributions made over the calendar year, and compare that to the employee’s total pay for the same period.
If the employer PRSA contributions do not exceed the employee’s earnings for the year, no BIK arises. Clearly the vast majority of employees will be in this category. And personal (i.e. employee) contributions to the PRSA are not included in this calculation.
But company owners and directors have different earning profiles – and in many cases forego pension payments altogether in the early years when they are trying to get a business off the ground, and every penny counts.
2. Where BIK does apply, PRSI and USC now apply too
Another big change: if there is an excess and BIK applies, the employee is now on the hook for PRSI, USC, and income tax on the amount above the limit.
Previously, when the combined employer and employee pension contributions exceeded the old age-based limits for PRSAs, only income tax applied to the BIK. That’s no longer the case – now it’s a full house of deductions.
3. The BIK itself doesn’t count as emoluments
It’s also worth noting that any BIK amount doesn’t get included in the definition of emoluments for the purposes of working out the 100% limit. It’s a pure tax hit. So you can’t “top up” an employee’s earnings by adding a calculated BIK value.
As there’s no practical way to get a refund on employer contribution to a pension, the only way to avoid that BIK cost if you have exceeded the limits would be to take a bonus salary payment (which you could likely then use to make an employee contribution to the pension, claiming tax relief).
Next steps
If you’re a company director or owner, this new complication highlights a need for in-year planning for what you’ll pay into your pension. There are many ways to structure the payments to get the result you want – including using different types of pension rather than PRSA.
Looking for help navigating PRSA contributions or working out what’s best for your business and employees? Get in touch with Moneycube – we’ll help you make sense of it.
