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Jul182011

Clarifying Employer Contributions to a PRSA

The following is an updated position on the treatment of employer contributions to PRSAs following clarification by Revenue (Revenue eBrief No. 36/11).
The purpose of this note is to clarify how employer contributions to an employee’s Personal Retirement Savings Account (PRSA) are to be treated for Benefit-in-kind, Income Tax, PRSI and Universal Social Charge (USC) purposes.

Benefit-in-kind (BIK)


An employer contribution to an employee’s PRSA is treated as a taxable BIK for the employee. However, for the purposes of obtaining tax relief on pension contributions, the employee rather than the employer is deemed to have made such a contribution to the pension fund (section 787E(2) Taxes Consolidation Act 1997). The effect of this provision is that the tax relief on the contribution negates the taxable BIK on the benefit provided. This treatment only applies where the employer contribution does not exceed certain limits based on the age of the employee.
Section 985A of the Taxes Consolidation Act 1997 provides that an employer is not obliged to operate PAYE on contributions to a PRSA for an employee.

Income Tax


It should be noted that while employer contributions to a PRSA are a taxable benefit in the employee’s hands, these same contributions qualify for full tax relief subject to certain agerelated limits. They are not subject to PAYE. It is the employee’s responsibility to contact Revenue where such contributions exceed the tax allowable limits to ensure the correct tax is paid on any excess contributions.
Employers should maintain appropriate records of their contributions to an employee’s PRSA. Employers may choose to put the contributions through payroll for the purposes of recordkeeping. However, if this is done it should be cost-neutral (for Income Tax and PRSI) to the employee and the employer.

PRSI


Since 1 January 2011, employee contributions to a PRSA are chargeable to PRSI – fully chargeable in the case of the employee and 50% chargeable in the case of the employer. In general, PRSI is only charged on emoluments that are taxed under the PAYE system. While employer PRSA contributions are a taxable BIK, they are not taxed under PAYE and are thus not chargeable to PRSI (both employer and employee share). 
Where employer PRSA contributions have been put through payroll and PRSI has been deducted, employers should make the necessary adjustment to payroll. 

Universal Social Charge (USC)


Since 1 January 2011, USC is chargeable on the taxable BIK of an employer contribution to 
an employee’s PRSA.
Example:
  • An employee who is 45 years of age with annual earnings of €50,000, makes a monthly  contribution to a PRSA of €150
  • The employer makes a contribution of €300 per month to the employee’s PRSA
  • The combined annual contribution is €5,400; €1,800 (€150 x 12) by the employee,  plus €3,600 (€300 x 12) by the employer
  • The employee can claim income tax relief on €5,400 and now PRSI relief on the employer contribution of €3,600
  • The employee must pay the Universal Social Charge (USC) of 7% on the employer contribution to the PRSA
  • The employer does not pay employer PRSI on the employer contribution to the PRSA
  • The employer pays employer PRSI on the employee contribution to the PRSA.  In this  example, this means employer PRSI is due on the €1,800 which is €96.75 (10.75% x 50% x €1,800)
The effect of the employer contribution in the above example means that the employee has claimed full income tax and PRSI relief on the employer contribution to negate the tax and PRSI liability on the benefit in kind.
This change will effectively reduce the rate of tax on employer contributions to PRSAs from  11% to 7%.

Source: Aviva - Pension Spotlight July 2011. 

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