Am I right in thinking that if an employer compensates an employee on an average salary via employer PRSA contributions instead of via salary with which to make employee PRSA contributions, they can benefit the employee by an additional 29 percent?
For instance, they could pay € 10,000 into the employee’s PRSA, or use that money to pay gross salary plus employer PRSI, in which case the employee could only pay € 7,729.25 into their PRSA without reducing their after-tax income, per the below worked example:
Suppose an employer pays an employee in their forties over € 40,000 a year gross. The employee’s marginal income tax rate would be 40%, their marginal USC rate 4.5%, and their employee PRSI rate 4%. Their annual PRSA contribution limit would be 25% of earnings. In addition, the employer would make employer PRSI payments on behalf of the employee of 11.05%.
Suppose further that the employer has a total of € 10,000 in profits available that they wish to distribute to the employee as a bonus, but that the employee wishes to contribute any additional earnings to their PRSA.
As far as I can tell, employer PRSA contributions—unlike employee contributions—are not subject to either employer or employee PRSI, or to USC. (See section 11.2 on page 17 of Revenue’s Universal Social Charge Tax and Duty Manual here: https://www.revenue.ie/en/tax-profe...ns-tax-corporation-tax/part-18d/18D-00-01.pdf) Consequently, the difference in tax savings between employer and employee PRSA contributions is quite significant. Can anyone confirm whether my understanding is correct, and my calculations below accurate?
Scenario A
The employer makes a one-off employer contribution of € 10,000 to the employee’s PRSA. Assuming that this additional contribution does not cause the total amount contributed by all parties to the employee’s PRSA that year to exceed 25% of their net relevant earnings, then neither the employer nor the employee is subject to any taxes on it:
Cost to employer: € 10,000
Benefit to employee: € 10,000 extra in PRSA, with no additional taxes owing
Scenario B
The employer subtracts the employer PRSI that they will be liable for from the € 10,000, and pays the balance in gross income to the employee, who is subject to USC and employee PRSI on the income, but gets tax relief at their marginal rate of 40% on the amount that they contribute to their PRSA:
Now, if the employee wishes to tailor their contribution so that their after-tax income is unaffected, they can contribute €4,637.55 / 60% (or, equivalently €4,637.55 x 1.6666...) = € 7,729.25:
Cost to employer: €10,000
Benefit to employee: €7,729.25 extra in PRSA with no additional taxes owing
So, unless I’m mistaken (which I could well be), the additional benefit to the employee of having their employer pay out the bonus—or any salary or raise for that matter—as an employer PRSA contribution, rather than taking it as income and then using it to make an employee PRSA contribution would come to:
€ 10,000 - € 7,729.25 = € 2,270.75, an increase of 29.38%
Does all this sound correct?
For instance, they could pay € 10,000 into the employee’s PRSA, or use that money to pay gross salary plus employer PRSI, in which case the employee could only pay € 7,729.25 into their PRSA without reducing their after-tax income, per the below worked example:
Suppose an employer pays an employee in their forties over € 40,000 a year gross. The employee’s marginal income tax rate would be 40%, their marginal USC rate 4.5%, and their employee PRSI rate 4%. Their annual PRSA contribution limit would be 25% of earnings. In addition, the employer would make employer PRSI payments on behalf of the employee of 11.05%.
Suppose further that the employer has a total of € 10,000 in profits available that they wish to distribute to the employee as a bonus, but that the employee wishes to contribute any additional earnings to their PRSA.
As far as I can tell, employer PRSA contributions—unlike employee contributions—are not subject to either employer or employee PRSI, or to USC. (See section 11.2 on page 17 of Revenue’s Universal Social Charge Tax and Duty Manual here: https://www.revenue.ie/en/tax-profe...ns-tax-corporation-tax/part-18d/18D-00-01.pdf) Consequently, the difference in tax savings between employer and employee PRSA contributions is quite significant. Can anyone confirm whether my understanding is correct, and my calculations below accurate?
Scenario A
The employer makes a one-off employer contribution of € 10,000 to the employee’s PRSA. Assuming that this additional contribution does not cause the total amount contributed by all parties to the employee’s PRSA that year to exceed 25% of their net relevant earnings, then neither the employer nor the employee is subject to any taxes on it:
Cost to employer: € 10,000
Benefit to employee: € 10,000 extra in PRSA, with no additional taxes owing
Scenario B
The employer subtracts the employer PRSI that they will be liable for from the € 10,000, and pays the balance in gross income to the employee, who is subject to USC and employee PRSI on the income, but gets tax relief at their marginal rate of 40% on the amount that they contribute to their PRSA:
| Available Profits | € 10,000.00 | |
| Employer PRSI | (€ 10,000.00 / 111.05) x 11.05 | € 995.05 |
| Gross Income | (€ 10,000 / 111.05) x 100 | € 9,004.95 |
| Income Tax | € 9,004.95 x 0.4 | € 3,601.98 |
| USC | € 9,004.95 x 0.045 | € 405.22 |
| Employee PRSI | € 9,004.95 x 0.04 | € 360.20 |
| Net Extra Income | Gross Income minus Income Tax, USC, and PRSI | € 4,637.55 |
Now, if the employee wishes to tailor their contribution so that their after-tax income is unaffected, they can contribute €4,637.55 / 60% (or, equivalently €4,637.55 x 1.6666...) = € 7,729.25:
| PRSA Contribution | € 4,637.55 / 60% | € 7,729.25 |
| Tax Back | € 7,729.25 x 40% | € 3,091.70 |
| Net Cost to Employee (= Net Extra Income) | € 7,729.25 - € 3,091.70 | € 4,637.55 |
Cost to employer: €10,000
Benefit to employee: €7,729.25 extra in PRSA with no additional taxes owing
So, unless I’m mistaken (which I could well be), the additional benefit to the employee of having their employer pay out the bonus—or any salary or raise for that matter—as an employer PRSA contribution, rather than taking it as income and then using it to make an employee PRSA contribution would come to:
€ 10,000 - € 7,729.25 = € 2,270.75, an increase of 29.38%
Does all this sound correct?
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