Personal Retirement Savings A/CS PRSA’s

Personal Retirement Savings Accounts (PRSA’s) - PAYE Net Pay Arrangement

Introduction

Tax Briefing Issue 47 - April 2002 contains a detailed article on PRSA’s. The purpose of this article is to outline the treatment of PRSA contributions deducted by an employer through the payroll, and related matters.

Net Pay Arrangement

Under the Pensions (Amendment) Act, 2002, employers, who do not provide an occupational pension scheme for their employees will be obliged to provide access to at least one Standard PRSA, and to make deductions from the payroll at the employee’s request in respect of the employees’ contributions to the PRSA.

As outlined in Tax Briefing Issue 47, where PRSA contributions are made through the payroll, income tax relief will, where appropriate, be given through the ‘net pay arrangement’. Before operating the ‘net pay arrangement’, the employer will have to satisfy himself/herself that the PRSA is approved by the Revenue Commissioners. In this regard, the employer must obtain a PRSA (Net Pay) Certificate from the employee and retain that certificate.

[The ‘net pay arrangement’ operates such that the employer deducts the PRSA contribution before calculating PAYE, PRSI and Health Contribution due on the employee’s emoluments for the relevant pay period].

PRSA Certificates

The relevant PRSA provider will issue a certificate to an individual contributor to an approved PRSA product. There will be three types of certificates. Employers should only use certificates with the term ‘net pay’ in the title as a basis for operating the ‘net pay arrangement’.

PRSA 1 Certificate - This certificate will be issued to individuals taking out a PRSA product not linked to an Occupational or Statutory Pension Scheme. There will be no income tax relief due on contributions made to this type of PRSA if the individual is a member of an Occupational or Statutory Pension Scheme.

Where an employee or director, who is a member of an Occupational or Statutory Pension Scheme, requests his or her employer to make deductions through the payroll in respect of contributions to a PRSA on foot of PRSA 1 certificate, the employer should not operate the ‘net pay arrangement’. The contributions should be deducted from the employee’s or director’s pay after deduction of PAYE, PRSI and the Health Contribution), as there is no income tax relief on such contributions.

PRSA 1 (Net Pay) Certificate - This certificate will be issued to employees and directors who are not members of an Occupational or Statutory Pension Scheme. Where an employer makes deductions through the payroll in respect of contributions to a PRSA for which the employer has received a PRSA1 (Net Pay) Certificate, the employer must operate the ‘net pay arrangement’ in respect of those contributions. The maximum contributions on which the net pay arrangement can be applied are set out below.

PRSA 2 AVC (Net pay) Certificate - This certificate will be issued to employees and directors taking out a PRSA AVC product which is linked to an Occupational or Statutory Pension Scheme. Where an employer makes deductions through the payroll in respect of contributions to a PRSA for which the employer has received a PRSA2 AVC (Net Pay) Certificate, the employer must operate the ‘net pay arrangement’ in respect of those contributions. The maximum contributions on which the net pay arrangement can be applied are set out below.

The PRSA Certificates will contain the employee’s date of birth and PPS Number. The employer will need to know the employee’s date of birth for the purposes of calculating the maximum amount of contributions on which to apply the ‘net pay arrangement’.

Limits

The maximum allowable contributions (and the maximum amount to which the employer can operate the ‘net pay arrangement’) are as follows:

Contributions [employee’s plus employer’s (if any)] to a PRSA only

An earnings cap of €254,000 will also apply. For example if an employee aged 40 earns €300,000. The maximum allowable contribution will be €76,200.

An employee will be entitled to tax relief on a contribution of €1,525 paid even if this exceeds the normal income-based limit.

For example, if an employee aged 23 earns €9,525, the normal income-based limit will be 15% of €9,525 i.e. €1,429. If the employee pays €1,600 the maximum relief that can be granted through the ‘net pay arrangement’ will be €1,525.

Contributions to an Occupational or Statutory Scheme and to a PRSA linked to such a scheme (PRSA AVC).

These limits will apply to the combined total of the employee contributions to the PRSA and the Occupational/Statutory Pension Scheme.

Contributions to a PRSA by employees in ‘specified’ occupations and professions

In respect of the following categories of individuals who are in employment:

Athletes
Badminton Players
Boxers
Cyclists
Footballers
Golfers
Jockeys
Motor Racing Drivers
Rugby Players
Squash Players
Swimmers
Tennis Players

the maximum allowable contribution will be 30% of the net relevant earnings, irrespective of age.

For the purposes of operating the ‘net pay arrangement’, the maximum limits outlined above should be reduced by the employer’s contribution to the employee’s PRSA - See example over.

Investment Companies

Earnings as a proprietary director or as a proprietary employee of an investment company are not regarded as relevant earnings for the purposes of income tax relief for PRSA contributions. Employers must not apply the ‘net pay arrangement’ in respect of contributions made through the payroll by such directors or employees.

Employers Contributions to a PRSA -Benefit - in - kind

An employer may make contributions on behalf of an employee to a PRSA. The employer’s contribution will be treated as a benefit- in -kind in the employee’s hands. However, the employee will be entitled to income tax relief (subject to the overall relevant limit) in respect of such contributions.

In practice this means that a benefit-in-kind charge will only arise where the combined contribution (employer’s and employee’s) exceed the relevant limits. This is unlikely to occur in most cases.

Employers will be required, on request by the Revenue Commissioners, to return particulars of PRSA contributions made on behalf of employees’ on the form P11D (Return of benefits -in- kind and other perquisites). Employees will also be obliged to make a return of such contributions on their own individual returns of income.