A Contractors guide to pensions & financial protection
Personal Retirement Savings Account (PRSA)
If you are using an umbrella company to trade as a contractor, then a PRSA is an ideal way to set aside funds for your retirement.
A PRSA is a way of helping people provide for their retirement by saving now. It is a long-term investment product sold by financial institutions and intermediaries. It allows you to create a pension fund for yourself when you retire; you can vary the amount you pay into it over time and, if you change employment, you can continue to use the same PRSA. You can switch from one PRSA to another at any time free of charge.
You may contribute as much as you like but Revenue have applied caps on allowable tax relief based on your age and salary. Tax Relief allowed on PRSA’s is allowed on income up to €115,000 and on a sliding age related scale.
Pensions are allowed to grow tax free. This means that all of your money is working for you all of the time.
Employer contributions can be written off fully as a tax deductible expense in the company’s profit & loss account. Ordinary Annual Contributions may be written off against Corporation Tax & Income Tax/USC/PRSI at source each year. Special Contributions may be made by the company to fund for service before the EPP was set up.
Depending on your personal circumstances your company could pay in much higher levels of pension contributions into an EPP than through a Personal Pension or a PRSA.Executive Pension arrangements are not restricted by the age related limits resulting in very generous scope for employer contributions. Employer contributions can be written off fully as a tax deductible expense in the company’s profit & loss account. Ordinary Annual Contributions may be written off against Corporation Tax & Income Tax/USC/PRSI at source each year.
Special Contributions may be made by the company to fund for service before the EPP was set up.
Depending on your personal circumstances your company could pay in much higher levels of pension contributions into an EPP than through a Personal Pension or a PRSA.
Extracting profits from a business – the options available
There are 3 main options for a business owner to extract profits from their Company:
a) Leave profits in the company and extract proceeds through sale of the company at some future date.
b) Withdraw profits as salary or dividends or,
c) Withdraw profits via Employer contribution to Executive Pension Plan. We have looked at the tax consequences of each option below.
Wealth Extraction Options from a Business
a) Retain within company with Profits subject to Corporation Tax @ 12.5% with potential for further surcharge of 20% if undistributed within 18 months and Capital Gains Tax @ 33% on Sale of Shares.
b) Withdraw as salary or dividends which will result in Income Tax, PRSI & USC potentially as high as 52% for the employee.
c) Withdraw as Employer Pension Contribution to Executive Pension with Tax Relief for the Company & no Income Tax, PRSI or USC for employee.
a) Leave profits within the business
Profits retained in the company will be subject to Corporation Tax @ 12.5% and for close companies a further surcharge of 20% if they are not distributed within 18 months. In addition, on the sale of the company Capital Gains Tax (CGT) of 33% will apply unless a CGT Relief can be obtained.
b) Withdraw profits as salary
Profits withdrawn in this manner will be subject to Income Tax, PRSI and USC which would be as high as 52% (Income Tax 40%, PRSI 4%, USC 8%).
c) Withdraw profits via an Executive Pension Plan
Extraction of company profits via an employer contribution to an executive pension is very popular with business owners. Profits withdrawn via an Employer contribution to an Executive Pension Plan result in tax relief for the Employer (subject to Revenue limits) and no immediate tax liability for the employee.
Income Protection For Contractors
A contractor may protect up to 75% of earnings by contributing to an Income Protection Policy. The type of Income Protection policy will be determined by the contractors trading status.
Tax-Efficient Life Cover
By taking out a Pension Term Assurance policy you will reduce the cost by getting up to 40% tax relief on the premiums.
Pension Term Assurance is a tax deductible life assurance policy. Because it is written under Revenue Section 785 premiums qualify for tax relief at an individual's marginal income tax rate - currently 40%.
To be eligible for Pension Term Assurance an individual must have a relevant source of income.
Depending on your employment status you may be eligible to take out either Personal Pension Term or Executive Pension Term.
- Personal Pension Term Assurance - Available to clients who are self-employed or in a non-pensionable employment
- Executive Pension Term Assurance - Available to clients who are member of their employers pension scheme, however there are Revenue restrictions on the level of cover provided.
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