In late 2022, there were some important changes to pension legislation.
Personal Retirement Savings Accounts (PRSAs) have undergone significant revisions as a result of the Finance Act 2022.
Limits on how much you could transfer into a pension also changed dramatically.
A significant development was the removal of contribution limits although the standard fund threshold of €2 million does still apply.
Due to these changes, a PRSA will likely be the choice of pension vehicle for business owners and company directors moving forward.
Extracting wealth from a company
As a business owner, you’ve likely spent many years building the business.
Ideally, you get to a position where you can look at extracting some of the capital you’ve built up.
However, it’s not always that simple.
You also want to extract that wealth in the most tax-efficient way possible.
There are 3 main options for a business owner to extract profits from their Company:
1. Through a salary
Probably the most obvious and most popular way of extracting wealth from a business is through a salary or dividends.
However, it’s not attractive from a taxation point of view. Income Tax, PRSI and USC mean it could be as high as 52% tax.
|Gross Withdrawal||Combined Tax (52%)||Net Salary|
2. Leave profits within the company
Perhaps you’d prefer to leave the profits within the business. This may add value in the event of a potential future sale of the business.
Although it’s a risk and circumstances may change. You’ll also be liable to Corporation Tax of 12.5% on all profits.
3. Extract wealth through a pension arrangement
The final option when extracting wealth from a business is through a pension arrangements.
Contributions to a pension arrangement offers some key benefits:
- Tax relief on contributions at your marginal tax rate
- Tax-free growth
- Tax-free sum at retirement
Changes to PRSA’s in particular have made option 3 attractive for many business owners and company directors.
These changes opened up PRSA’s to much larger, tax-efficient company pension contributions than we have seen previously.
Previously, we would have defaulted to Executive Pension Plans to cater for company directors and key employees.
However, Executive Pension Plan contributions were calculated on age, salaried service, annual salary and retirement age.
If you’d paid yourself a healthy salary over many years then you’d likely have nothing to worry about.
But if you didn’t, then the criteria could be quite restrictive.
Enter the PRSA and the new legislation changes.
Pension changes and the benefits for Business Owners
The changes within the Finance Act 2022 eased restrictions on contribution limits.
Company owners and directors now have much greater flexibility.
How can business owners and employees benefit from these changes?
- Companies have the ability to contribute unlimited amounts free from BIK to any employee or company director(as per the standard fund threshold of € 2 million)
- Use PRSA’s to fund their retirement in a tax-efficient manner.
- It allows business owners the flexibility to maximise pension contributions in a short space of time.
- Companies can contribute to both an occupational pension and a PRSA for an employee.
Overall, the important part of these changes is flexibility.
As a business owner, you now have the scope to transfer large amounts of wealth out of your business in a tax-efficient way.
What should you do next?
If you’ve significant capital built up in your business, it may be time to assess your options.
It’s important to understand when pension legislation changes and that you’re aware of all potential avenues.
Options that were previously unavailable may now be accessible.
It’s worth noting that each situation should be judged on an individual basis.
If you’re a company owner or director and would like to explore your options, you’re welcome to contact our team.
We specialise in assisting business owners of all sizes.
Complete the form below to arrange a chat and assess your options.
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