Personal Financial Planning is not always a priority for business owners, company directors and those in senior positions. Increasingly busy schedules and demanding responsibilities often mean retirement planning is put on the back burner. You’re losing out on significant tax relief on retirement savings and investment opportunities by not prioritising your retirement. Your pension should always be a key part of your financial plan. So, how can changes to the Finance Act 2022 benefit your retirement plan?
Here’s something to think about:
The most tax efficient way for a business owner to extract some of the wealth from their business into their own name is through a Pension. A salaried director of a limited company can avail of very attractive levels of pension funding with tax relief for themselves and the company, whilst a senior company executive has the option of paying into a Personal Retirement Savings Account (PRSA) with greater benefits, funding flexibility and tax relief.
If your business is profitable, you can extract much of that wealth from the company by making significant contributions to a PRSA for yourself and your family. You can extract this wealth for your spouse and/or any family member over the age of 18 who is employed by the company, regardless of their salary or length of service.
If you have already accessed your workplace pension, you may be able to further fund towards your retirement pot using a PRSA structure.
Since January 1st it looks like the old rule book has been thrown out. Make sure all funding is done with the blessing of your Tax Advisor.
Changes to the Finance Act 2022
Changes to the Finance Act 2022 that came into effect since 1st January 2023 mean PRSAs have become a more attractive option for individuals, particularly company directors who may be drawing lower salaries and are not in an occupational pension scheme. The new PRSA option provides greater flexibility of funding, benefits, features, and investment choices, including:
- Improved funding limits* for employees and company directors, all employer contributions receive tax relief in the year they are paid
- Full PRSA fund is paid to employees’ estate should they die in service
- Company directors and Business owners who employ their spouse can provide enhanced pension funding for them whilst at the same time reducing the company’s tax bill
- Includes sole traders & partnerships
- Company directors who already accessed benefits but are still in employment
- Not subject to investment rules, trusteeship established by new legislation
- Client & advisor have more control
- PRSA at the centre of every retirement plan
*subject to Standard Fund Threshold
Why are the changes important?
- Since January 1, 2023 an Employer Contribution to a Personal Retirement Savings Account (PRSA) is no longer treated as a Benefit in Kind
- (a BIK is any non-cash benefit of monetary value that is provided by the employer to the employee and as such is treated as taxable income)
- for income tax purposes
- Employer Contributions to a PRSA are no longer restricted by age related limits
- Employee Contributions to PRSAs aren’t restricted by any Employer Contribution paid which was the case up to now. Employees can now contribute more and claim tax relief via PRSA
- There is no restriction on Employer PRSA Contributions in any way and it is not based on the employee’s salary or length of service
- Currently, tax relief on all employer PRSA contributions can be claimed in the accounting period in which it is paid
- Moving forward an Employer can make any Employer Contribution to a PRSA. The only limit being the overall Standard Fund Threshold of €2 Million. These benefits are taxed at a punitive tax rate of 71%
- An Employer can make an Unlimited Employer Contribution (linked to the employee/self-employed income) to a PRSA and claim tax relief in the accounting period in which its paid based on the current legislation
- It applies to Employees and 20% Directors. Applies to 20% Directors of Investment Companies, where the director is registered as an employee of that company and receives a salary under Schedule E
- Self Employed Person or Partnership can pay a Benefit in Kind Free Employer PRSA Contribution for an employee
- An Employer can contribute to a scheme and a PRSA at the same time, for the same employee
- An aspect of the PRSA which some directors may find attractive is the death benefit claim for an active member. PRSA funds can now be paid in full to the estate of the deceased member in the event of death. Occupational pension schemes place restrictions on the maximum allowable lump sum payable. The residual funds are used to provide a pension via an Annuity or to purchase an Approved Retirement Fund (ARF) for a spouse or dependents.
This is brand new ground for the Pensions Industry, so we are all grappling with the impact these new rules will have for customers but talk to us today to see how we can help you… click here to book a chat.