Irish executives with pension funds over the standard fund threshold of €2m will be caught by auto-enrolment’s broad net.
Reported recently in the Irish Times: the scope of the incoming auto enrolment, which is aimed at the three quarter of a million Irish workers who are not in a pension scheme, means it may “include people who have ceased contributions to a pension scheme to remain below the SFT,” as a spokesman for the Department of Social Protection confirmed.
This means high-paid executives who stopped pension contributions may face unexpected tax implications under the new auto-enrolment (AE) scheme, and employers and business owners may need to review their pension strategies.
Auto enrolment and pensions over €2m: executive summary
- High earners who stopped contributing to pensions to avoid exceeding the €2 million tax-friendly threshold will be automatically enrolled in the upcoming AE scheme.
- Anything over the SFT is taxed at 40%. As the same money is taxed again when drawn down, and including universal social charge, this means the excess is liable to tax at 68.8 per cent, says one industry report.
- The AE scheme targets mostly lower-paid workers but will also include those who opted out of contributions to stay below the SFT limit.
- Individuals can opt out of AE after six months, but employer and state contributions will remain invested. Any earnings on these contributions exceeding the threshold will be taxed at a higher rate.
- Cash payments in lieu of pension contributions for high earners may become less attractive due to AE.
- Read more at irishtimes.com/business/2024/04/30/irish-executives-with-pension-funds-at-2m-limit-to-be-caught-by-auto-enrolment/
Standard fund threshold public consultation has now closed
The public consultation on the standard fund threshold (SFT) has now closed. Themes from submissions published online included:
- Increasing the limit and indexing the threshold: The €2 million threshold has not changed since since 2014.
- Reduce the chargeable excess tax (CET) rate and create flexibility in payment options to treat public and private sector employees equally: The CET rate is set at a high rate of 40%. Public sector employees can spread this cost over 20-years but private sector retirees must pay their CET bills in a lump sum at retirement.
Auto-enrolment and Irish employees
Under the AE plan, employees and employers will initially each pay 1.5% of gross salary into the scheme. Contributions will be raised over 10 years, increasing every three years until they reach 6%. Employers match employee contributions, and the State then top up.
- Employees who earn more than €20,000p/a, between 23 and 60, and who do not have a pension scheme will be automatically enrolled into the new system.
- People earning under €20,000, and those outside the age bracket will also be able to opt in, as long as they aren’t already in a pension scheme.
- Each €3 contributed by employees will be matched by their employer, with the State adding a further €1.
- Employer and State contributions will be capped at €80,000 per year.
What is auto-enrolment? Here’s our guide to what Irish businesses need to know.
Got questions on auto enrolment and its effects on pensions and payroll?
Our experienced team can assist you in assessing and managing these and any other pension payroll changes. See our services here or email info@paulodonovan.ie to discuss your needs.