Let’s talk about the new pension rule in Ireland. As a business owner in Ireland, it is crucial to understand the changes in pension regulations that affect your employees and your company. Planning and saving for your financial future include staying updated on the latest finance laws and bills. The latest finance bill, which came into effect on January 1, 2023, has brought a new opportunity for you to do just that.
In this article, we will explain the new pension ruling on benefit-in-kind (BIK) tax on employer contributions to PRSAs (personal retirement savings accounts), which allows business owners the opportunity to make larger pension contributions for their retirement savings. we will explore the latest pension regulations, what they mean for your business, and how you can comply with the new requirements.
The New Pension Rule Explained
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 the number of years of service in your company. This often led to directors taking higher salaries than they needed to fund their lifestyle just to justify large pension contributions.
The new rule means that you can now make employer pension contributions directly from your company to a personal pension, without the contributions being subject to benefit-in-kind tax. This change is expected to reduce the incentive for company directors to take higher salaries than they need in order to justify large pension contributions. The maximum pension fund limit of €2mil still applies, but it will no longer be tied to a specific salary or years of service.
By taking advantage of this new rule, you can make larger contributions to your personal pension account, which will ultimately lead to a larger retirement fund. It also allows you to save money on taxes, as you will not be subject to BIK tax on your employer contributions.
Example 1: Limited Business Owner
Michael, 60 years of age, has a Limited company. 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 year-end.
In previous years, Michael would have been limited to an employer contribution of around €10,000.
With the new changes, in theory, Michael 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 Michael 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 – Business Chain Owner
Mary, 35 and single, owns three hair salons as part of a chain. Each salon is performing well and cash flow is very strong. She thinks she could extract around €10,000 per month without putting the business at risk.
However, Mary 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 in a higher tax bracket.
Under the old rules, Mary 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.
How Financial Advisors Help You
Now is the perfect time to review your current pension plan and consider making changes to take advantage of the new rule. Talk to us to help you determine the best course of action for your specific situation, and to ensure that you are maximising your retirement savings.
The new pension rule for business owners is a significant change that could have a major impact on your retirement savings. Removing the BIK tax on employer contributions to PRSAs gives business owners the opportunity to make larger pension contributions and ultimately have a larger retirement fund. As a business owner, it’s important to take advantage of this new rule, and consult a financial advisor to ensure that you’re maximizing your retirement savings.
For more information, book a Financial Consultation with our experienced advisors today.
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