As a business owner, planning for your financial future is not just a smart move; it’s essential. In Ireland, there are unique opportunities for business owners to make tax-efficient contributions to a pension and reap lucrative rewards. In this blog post, we explore how business owners and company directors can take advantage of these opportunities, especially in light of recent changes to legislation that have expanded the possibilities for directors’ pension planning.

Company directors can take advantage of different pension planning rules

First and foremost, it’s crucial to understand that business owners have a different set of rules and opportunities when it comes to pension contributions. Unlike the usual tax-relief limits that apply to individuals, companies that make contributions to pensions are not subject to the same constraints. This means that business owners can have their companies make substantial contributions to their pensions and those of key employees, all while reducing the company tax bill.

To benefit from the corporation tax deduction, these contributions must be made before the end of the company’s corporation tax year. It’s important to note pension payments cannot be backdated to a previous tax year. That means if your company’s year-end is in December, you should start looking at your options now.

Legislation changes to PRSAs mean greater rewards for business owners

Significant changes have occurred in pension planning that came into force on 1 January 2023, specifically concerning Personal Retirement Savings Accounts (PRSAs). These changes have opened up new opportunities and avenues for business owners looking to maximise their pension contributions while enjoying full corporation tax relief.

1. No Age-Related Limits: Previously, age-related tax relief contribution limits limited a company’s ability to contribute to employee or director PRSAs. Now, this restriction no longer applies.

2. Unlimited Employer Contributions: Companies can now make unlimited employer contributions to employee PRSAs without any age-related limits. This flexibility empowers business owners to contribute more substantially to their retirement funds.

3. No Benefit-in-Kind Treatment: Employer contributions to PRSAs are no longer treated as Benefit-in-Kind. This removes a significant previous restriction, making PRSAs an even more attractive option for business owners.

4. Full Corporation Tax Deduction: Companies can now claim the full corporation tax deduction in the accounting year the payment was made. This is a significant benefit that directly impacts a company’s bottom line.

Pension Considerations for Directors and Business Owners

With these changes in mind, directors and business owners have a unique opportunity to supercharge their pension planning. There are some key points to remember:

· Contributions are for registered employees in an employer-employee relationship, with salary paid and taxed under PAYE.

· Unlike some pension plans, factors like salary and service duration don’t affect employer contribution capacity.

· The primary constraints are the Lifetime Pension Fund Limit (€2 million) and the company’s financial capability.

· PRSAs offer a tax-efficient way to fund retirement and reduce corporation tax liabilities during profitable years.

· In the unfortunate event of the business owner’s death before retirement, the full value of a PRSA is paid to the estate as a tax-free payment.

· Employers can contribute to both occupational pensions and PRSAs, giving them flexibility in pension planning.

Keep in mind if your company end is in December, the time to take action is now; you cannot backdate contributions so it is too late to think about your pension in January.

Talk to a financial advisor at Hennelly Finance to find out more about your options and how the changes to PRSAs can help you achieve your retirement goals sooner while reducing your corporation tax liability.