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Speedbrief on the Finance Bill 2022

  • Ireland
  • General

02-11-2022

Pension Taxation Changes on the Horizon

The Minister for Finance published the Finance Bill 2022 on 20 October 2022 following the Bill completing its first stage in the Dáil. It is anticipated that the Bill will be signed into law by the President on or before 25 December 2022, in line with previous years, and by the end of the year at the latest.

The Bill includes significant amendments to the tax rules applicable to contributions to Personal Retirement Savings Accounts (PRSAs), which enhance the attractiveness of PRSAs and put them on a more equal footing with occupational pension schemes. After 20 years, is the neglected child of the Irish pension system finally going to come into its own?

The Bill also includes some other important pension-related changes, including the tax treatment of lump sums from foreign pension arrangements as well as the establishment of tax rules for the Pan-European Personal Pension Product (PEPP).

The current position for PRSAs

Employer contributions to PRSAs are presently treated as a benefit-in-kind (BIK) for the purposes of payroll taxes. This has hobbled efforts to develop the PRSA product as a genuine alternative to occupational schemes. In particular, it has maintained the popularity of one-member pension schemes (OMAs) in the owner-managed and executive sectors of the market, and the profusion of these schemes has become a headache for regulatory authorities.

Implications of proposed change

The Inter-Departmental Pensions Reform and Taxation Group established pursuant to the Government Roadmap for Pensions Reform 2018-2023 recommended that “employer contributions to PRSAs should not be subject to BIK”.

It now appears that this recommendation will be implemented, which will increase the scope for employer contributions into a PRSA, and make PRSAs a more flexible vehicle for occupational pension provision.

Other relevant changes in the Bill

Lump sums from foreign pension arrangements

From 1 January 2023, an individual who is paid a lump sum from a foreign pension (which does not come within the scope of the tax rules for Irish pension lump sums) may claim a tax-free exemption of up to €200,000 on the lump sum. The next €300,000 of any excess will be taxed at the standard rate (20%) with any portion above that level taxed at the individual’s marginal rate of income tax and USC. The standard rate charge is effectively ring-fenced so that no reliefs, allowances, or deductions may be set against the portion of a lump sum subject to this tax charge.

Pan-European Personal Pension Product (PEPP)

The Bill also introduces a new provision in the Taxes Act to provide for the taxation and relief rules for the PEPP, modelled on the existing PRSA provisions, as required under EU law. The PEPP is an EU-wide voluntary personal pension scheme that seeks to complement existing public and occupational pension systems, as well as national private pension schemes.

Comment

It is welcome that reform of the pension tax code, initiated in last year’s Finance Act, is continuing to gather pace. This is a key ingredient in the overall Government objective of achieving greater pension coverage in Ireland.

For more information, please contact,

Peter Fahy, Partner
Robert Dever, Partner

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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