FORSYTHE FINANCIAL PLANNING

Extracting wealth from their business in a tax-efficient way is a significant challenge for business owners. While salary plays an important role in this as an immediate access to wealth to fund the owner’s lifestyle, it is expensive with approximately 50% of the amount extracted being paid in tax and other deductions. Business owners look for other solutions to extract wealth, recognising that they may have to defer the receipt of that wealth until they retire or exit the business.

With Executive Pension Plans, companies could make generous pension contributions into funds for the ultimate benefit of the business owner. The contribution levels were limited by salary/age/service, but usually significant contributions could be made.

As mentioned above, in July 2022 the market was thrown into a state of flux, with business owners wishing to establish new pension schemes being unable to make tax-efficient large company contributions.

However, this was followed by the Finance Act 2022 which came into law at the end of last year, which opened up a significant and very attractive opportunity for business owners, particularly for profitable businesses. 

The change relates to Personal Retirement Savings Accounts (PRSAs), which up until the beginning of 2023 treated employer contributions as a Benefit-in-Kind for an employee from an income tax perspective. 

The Opportunity 

The new opportunity is for profitable businesses to be able to make generous pension contributions to a PRSA for the business owner, with the only restriction from a tax effectiveness perspective being to avoid funding past the SFT.

Also, if your spouse and/or your children are actively and demonstrably working in the business, the company can also fund pensions for them up to the SFT. That is a significant wealth extraction opportunity for a family business.

In addition, it’s worth noting that PRSAs differ from company pension plans when taking your benefits. First, you can get access to your benefits from age 50. Also, with a PRSA you can phase in your retirement by dividing your pension funds across multiple PRSAs. This can significantly reduce the level of tax paid on your pension in retirement. This option is unavailable when retiring from an occupational pension scheme.

So the previously unattractive PRSA has now become a fantastic wealth extraction vehicle for business owners of profitable companies.

Removal of Benefit-in-kind (BIK) for an Employee

A positive change has come into effect as of 1 January 2023 for Employer contributions to a PRSA. The Finance Act has now confirmed the removal of the Benefit-in-kind (BIK) charge on Employer contributions to a PRSA. This means that where contributions were previously treated as a BIK for the purposes of employee income tax, such contributions will now NOT attract a tax charge for an employee.

Business Owners can now extract cash from the company in the most tax-efficient manner by making uncapped contributions to a PRSA.

How does this impact Employees?

As an employee, you now enjoy the same tax treatment as occupational pension scheme members in relation to any employer contributions to the scheme. This means that employer contributions will no longer be treated for tax relief purposes as an employee contribution.

Previously where an employer paid into the PRSA, that employer contribution used up part of the employee’s own Revenue limits. This restricted Employer PRSA contributions to levels that were significantly less than allowable contributions to an Executive Pension or a Master Trust equivalent.

This is no longer the case!

What impact will this have on Employers?

Employers will now be able to pay unlimited BIK-free contributions to a PRSA for an employee or company director. The contributions will not be limited by salary and service, existing scheme funding, or retained benefits (pension benefits already accrued).

There is no longer a limit on employer contributions to a PRSA and no requirement to spread forward tax relief as would be the case in Occupational Pension Schemes (OPS/Executive Pensions/OMA) when taking into account Ordinary Annual and Special Contributions.

Warning: An employer can only make a contribution to a PRSA for a bona-fide employee (i.e., an employee who is receiving a salary under Schedule E with PAYE applied at source). 

Another key advantage of the PRSA, is a simpler approach to a death claim. PRSA funds can be paid in full to the estate of the deceased member in the event of death. This was not always an option under previous arrangements.

Occupational pension schemes place restrictions on the maximum allowable lump sum payable with residual funds being used to provide a pension via an Annuity or to purchase an Approved Retirement Fund (ARF) for a spouse or dependents.

Executive PRSA Advantages for Company Directors

Traditionally company directors funded for retirement using Executive Pension Plan (EPP) arrangements or One Member Arrangements (OMA) under a Master Trust. The funding rules within those schemes are generous and allow for maximum funding to maximise the tax advantages to the director.

However, if you are a company director and are currently funding an existing scheme, or have not set one up yet, the new and improved PRSA may be a more attractive option, particularly if:

As there is no maximum funding calculation required to determine the ability of the employer to contribute to a PRSA, those on higher salaries have an opportunity to extract a larger amount of profits and obtain tax relief within the current tax year.

Effectively, The only limit relates to the Lifetime Pension Fund Limit (Standard Fund Threshold, currently €2,000,000).

These contributions will also be allowed as an expense in the year in which they are paid (with no upper limit).