Dáil Éireann Debate, Thursday - 15 February 2024
183. Deputy Pearse Doherty asked the Minister for Finance the estimated cost, through tax revenue foregone, of the BIK exemption for employer contributions for PRSAs which was introduced through section 22 of the Finance Act 2022; and if he will make a statement on the matter. [7396/24]
Amharc ar fhreagra184. Deputy Pearse Doherty asked the Minister for Finance if, with respect to Committee Stage of the Finance Act 2022, with regard to what was then section 18 of the Finance Bill 2018 regarding the removal of benefit-in-kind charge from employer contributions to PRSAs and PEPPs, his views and response regarding queries made by this Deputy that this provision of the legislation would provide an opportunity for aggressive tax planning by proprietary directors; his assessment of whether the then Minister for Finance provided an accurate response with respect to the issue raised; and if he will make a statement on the matter. [7397/24]
Amharc ar fhreagra185. Deputy Pearse Doherty asked the Minister for Finance the maximum amount, in nominal terms, that a company or proprietary director can fund a single PRSA through an employer contribution in a single year with full tax deductibility; and if he will make a statement on the matter. [7399/24]
Amharc ar fhreagra186. Deputy Pearse Doherty asked the Minister for Finance if he is satisfied that the recommendation of the Report of the Interdepartmental Pensions Reform and Taxation Group of 2020, that “the differential treatment of the PRSA for funding purposes should be abolished, employer contributions should not be subject to BIK”, was implemented in whole or in part; his views on whether the manner in which this recommendation was partially implemented in Finance Act 2022 by the then Minister for Finance created an opportunity for aggressive tax planning; and if he will make a statement on the matter. [7401/24]
Amharc ar fhreagra187. Deputy Pearse Doherty asked the Minister for Finance if he or his Department have received any correspondence from the Revenue Commissioners or any other body regarding section 22 of the Finance Act 2022 in relation to the opportunity it creates for aggressive tax planning; and if he will make a statement on the matter. [7402/24]
Amharc ar fhreagra188. Deputy Pearse Doherty asked the Minister for Finance his views on the appropriateness of a company or proprietary director withdrawing up to €2.15 million from a company in a single year through an employer contribution to a PRSA, and availing of full tax deductibility, including corporation tax relief; and if he will make a statement on the matter. [7404/24]
Amharc ar fhreagraI propose to take Questions Nos. 183 to 188, inclusive, together.
The Finance Act 2022 removed the difference in treatment of PRSAs and occupational pension schemes for funding purposes, by abolishing the BIK charge on employer contributions to an employee’s PRSA, and not counting employer contributions to an employee’s PRSA towards that employee’s age related and salary percentage limits on tax deductible contributions. These changes were recommended by the Interdepartmental Pension Reform and Taxation Group (IDPRTG) with a view to improving and simplifying the pension landscape in Ireland.
In discussing the differential treatment of funding rules for pension products, the IDPRTG Report states “Maximum contribution funding rules, from a taxation perspective, favour occupational schemes. Initiatives aimed at simplification and harmonisation of tax rules in this area are complicated by the differing nature of product and occupation based pension models .”
The Report goes on to state “One potential, partial remedy to the differential treatment would be to remove the impacts of the current restrictions on employer-related contributions to PRSAs. This would have the effect of levelling the playing field.”
In discussing the possible impacts of its implementation, the Report acknowledges such a change would also likely result in a change in behaviour, encouraging increased PRSA contributions. However, it also states that this is likely to be a displacement of contributions that otherwise would have been made to new single member schemes.
The only recommendation the Report makes in relation to funding standards is that“the differential treatment of the PRSA for funding purposes should be abolished and employer contributions to PRSAs should not be subject to BIK” , which is the purpose of the changes brought in by Finance Act 2022. The appropriate approach to implementing this recommendation was considered in detail by my Department and the IDPRTG, and it is considered that this recommendation is fully implemented taking into account the inherent differences between occupational pensions schemes and PRSAs and PEPPs.
I am advised by Revenue that for occupational pension schemes, PRSAs and PEPPs, tax relief is available for employee contributions, subject to the age-related percentage of earning threshold - between 15% and 40% of “net relevant earnings”, with the percentage depending on age, and subject to a maximum earnings threshold of €115,000.
For occupational pension schemes, PRSAs and PEPPs, employer contributions are deductible against their profits at the Corporation Tax rate for pension contributions on behalf of their employees. This was the case before Finance Act 2022 and remains the case today. This was seen as important aspect of encouraging employer contribution to employees’ pensions.
Employer contributions to these pension products are not a taxable BIK and therefore do not give rise to a tax charge for the employee. There is no age-related limit or upper limit on employee tax relief from BIK for employer contributions.
The Deputy asks the maximum amount, in nominal terms, that a company or proprietary director can fund a single PRSA through an employer contribution in a single year with full tax deductibility. I am advised by Revenue that there is no legislative limit on employer contributions to an employee’s PRSA. Proprietary directors have control over their remuneration package and the form of their pension contributions. It also facilitates a situation where they opt not to fund for their retirement until late in their career, frequently opting instead to invest in their companies in the early stages.
Occupational pension schemes are subject to a requirement that aggregate contributions to such schemes must not produce a fund that exceeds the amount that will provide a maximum pension on retirement to any scheme member of more than two-thirds of their final salary. The overall value of an individual’s PRSA or PEPP is not subject to a limit relating to the final salary of the PRSA or PEPP saver because a PRSA or PEPP is a personal pension product which is not directly linked to an employment, so such a limit would not be appropriate.
However, PRSAs, PEPPs and occupational pension schemes are subject to the “standard fund threshold” (SFT). It is provided for in Chapter 2C of Part 30 of the TCA which sets out the maximum allowable pension fund at retirement for tax relief purposes across all pension products, which is currently €2 million. This is the key limitation on the size of tax relieved pension savings, and any pension greater than the SFT will be subject to chargeable excess tax at 40% once the benefit is crystallised.
It is the case the there is no specific limit on employer contributions to a PRSA and a significant sum could be made in a single employer contribution in one year, and be eligible for relief from corporation tax. However, any subsequent contributions (either employer or employee) and indeed any growth in the value of the fund would be subject to chargeable excess tax at 40%.
I am informed by Revenue that there is a continuous focus on compliance across pensions, identifying and confronting non-compliant behaviour across schemes and products. This is in line with Revenue’s Corporate Priorities 2024 commitment to comprehensively use the full suite of interventions set out in their Compliance Intervention Framework (CIF) to assist voluntary compliance and to provide an appropriate response to non-compliance.
Revenue have informed me that in 2023 there were 8,660 employers making pension contributions to PRSAs on behalf of their employees at some point in the year. The total sum contributed to these PRSAs by the employers was approx. €182m, as recorded on payroll submissions to Revenue. These contributions are exempt from benefit in kind tax on the employee. While it is not possible to provide an exact tax cost for this exemption, a tentative tax cost of €69m for 2023 can be derived by applying an estimated average marginal rate of tax of 38% to the total value of contributions. This estimated cost cannot distinguish between contributions that would have been subject to BIK prior to Finance Act 2022 and those that were already exempt, as well as any new PRSAs.
