Exciting changes to pensions offer new opportunities for business owners

by Paddy Andrews
 

It’s not very often you see a headline with the words “pension” and “exciting” in the same sentence.

However, as of 1st January 2023, there’s been a significant change to how businesses can contribute to pensions. This has created some genuinely exciting retirement planning opportunities for business owners, company directors, and key employees.

What’s changed?

 
Up until now, if you were a company director you could make employer pension contributions directly from your company to a company pension in your own name. However, the amount you could contribute was limited by your salary and number of years’ service in your company.

For example, previously if you wanted to get to the max pension fund of €2mil, you would need:

 
• a salary of €100,000

• 10 years’ service.

 
In many cases this led to directors taking higher salaries than they needed to fund their lifestyle just to justify large pension contributions.

That has all changed now. As of 1st January 2023, the latest finance bill has removed benefit-in-kind (BIK) on employer contributions to PRSAs (another form of personal pension).

What does it mean for me?

The effect of this is that employer contributions to a PRSA are no longer linked to your salary and service – they’re now unlimited. If you’re an employee or owner of a company and draw any salary, there’s no cap on employer contributions to a PRSA in your name.

Let’s look at a few example scenarios.

Example 1

John has a Ltd company and is 60. He invoices c. €200,000 into his company and draws a small salary of €10,000 as he has other income and assets to sustain his lifestyle. Any further income in his name will be taxed at 52%. The cash has been building up on deposit in his company for several months. It’s losing value to inflation and may be liable to corporation tax at his year end.

In previous years, John would have been limited to an employer contribution of around €10,000.

With the new changes, in theory John could now make an employer contribution of €190,000 (the balance of the cash in his business after his salary) per annum into a PRSA to extract the cash from his company that was on deposit. It’s now in a PRSA where it grows tax-free. That’s a win!

Let’s take the same example but assume that John already has a pension fund of €2mil and can’t contribute any more to his pension.

His wife Mary is a shareholder and director in the company, and she too draws a salary of €10,000. Mary has no pension funding to date and only joined the company last year. The company could make an employer contribution of €180,000 to a PRSA on her behalf each year, which is simply a different way of achieving the same benefit explained above.

Example 2

Patricia is 35, single, and owns three restaurants as part of a chain. Each restaurant is performing well and cashflow is very strong. She thinks she could extract around €10,000 per month without putting the business at risk.
 

However, Patricia only needs €40,000 salary per annum, as she doesn’t spend much and spends most of her time working. She does not want to increase her salary, as it will put her into a higher tax bracket.
 

Under the old rules, Patricia would be limited to employer contributions of around €2,100 per month. As of now, she can set up a PRSA and will be able to contribute €10,000 per month without having to increase her salary.

I want to benefit from the changes!

If you think this would be of interest to you or have any queries at all we recommend that you do the following:

• If you don’t have a financial plan, don’t do anything until you have one. If you do, contact your financial planner and update your financial plan.

 

• Get independent tax advice from a qualified tax adviser, there is no cap on what you can put into a PRSA but there may be other things you need to consider such as corporation tax relief, entrepreneurs’ relief etc.

If you’d like to talk through the details and understand how the changes to pension rules could benefit from you, please don’t hesitate to give us a call on 01 908 1500 or email us at info@metisireland.ie.

Stay tuned for next week’s blog on the other benefits of PRSAs.

Paddy Andrews
Private Client Manager

Disclaimer: Metis Ireland is not a tax advisor. All content in these blog posts is intended for information purposes only. We recommend that you should always seek independent tax advice.