This week I share a short piece with you to help prepare for relevant (potential) changes in the upcoming Budget. What we’ll all want to avoid is seeing a change come into effect that we could have seen coming, and that we could regret not having taken action on! We want to avoid regret, so lets not look back in anger – I heard you say! I’ll touch on;

• PRSA changes and limits to contributions
• Inheritance changes
• Pension pot size changes

The Budget (1pm-ish on Tuesday 1st October 2024) will address many areas outside of these topics. Areas such as social welfare payment, rent reliefs, cost of living packages etc. However, we’re focusing on the above 3 key topics as they relate to individuals who are planning (or trying to plan!) around them!

While I mention Social Welfare payments; interesting piece from Social Justice Ireland here which states that while c13% of the population was defined as living in poverty, without Social Welfare payments, 34% of the population would be living in poverty. Shows the importance of those payments for a fairly large percentage of the population of Ireland. They are calling for a €25 per week increase to the core Social Welfare rate, to get that to their benchmark of 27.5% of the average earnings. We’ll see if that happens on 1st October!

What Changes Could We See in Budget 2025?

• There is lots of political kite-flying and rumoring about potential changes to the following relevant questions:
  Will the Standard Fund Threshold (SFT) for pensions increase from the current €2m level?
• Will the level of contributions allowed into PRSAs reduce? and revert back to old Revenue maximum calculations?
• Will the rates of Exit Tax (41%) and CGT rate (33%) be adjusted, on profits from investments?
• Will the tax free thresholds for inheritance tax be increased?
  

Let take a quick look at each….

Standard Fund Threshold in Ireland

The SFT has remained at €2 million since 2014.

According to KPMG’s submission (read it here), average earnings have increased by 34% in that time. They suggest, were it inflation adjusted, the Standard Fund Threshold should €2.68 million. But it’s not, its still €2m.

And very high-level, if you have pension values over €2m, you’ll pay additional taxation called Chargeable Excess Tax (CET), on any amount above the €2m. Read our Blog 151 here for more on this or Revenue’s Pensions Manual Chapter 25 here.

You might say that sure anyone with pension assets over €2m has little to be worrying about – however it is a very real issue for people. Perhaps you had early success in business and/or were a very diligent saver into pensions from an early age. Thanks to compounding and the fact that pensions grow tax-free, it is not wildly unusual to achieve the €2m mark, particularly if you don’t need to draw the pension until 60’s or indeed 70’s.

Or if you have been a member of a Defined Benefit pension scheme in a PAYE role. If your salary has been relatively high, you’ll likely have accumulated annual DB income that pushes you beyond the SFT limit based on calculations. In that scenario, you’d see your equivalent DB income cut significantly due to the SFT liability. It happens.

Will we see the SFT limit increase? We hope so. They were due to have published their report during the summer. However, it seems there has been considerable negotiations and political maneuvering around this one! We dearly hope it is indexed, and that diligent savers are not punished, are treated fairly. Ultimately, all we ask it that they are not penalised, often hundreds of thousands of excess tax, for being good savers.

Will the level of contributions allowed into PRSAs reduce?

Important Pension Changes in Ireland You Need To Know (informeddecisions.ie)

Prior to January 2023, pension rules meant meant that an Executive Pension or Single Member scheme was the optimal way for a business to get maximum contributions into a pension for an owner or an employee.

The 2022 Finance Act changed all that. It entirely removed Benefit in Kind (BIK) from an employer contributions to PRSAs! This took effect on 1 January, 2023.

This massive pension change here in Ireland meant that a company can now, in theory and with accountant’s sign-off, make unlimited contributions of company cash to a PRSA (being mindful of the above €2m SFT of course!). This has flipped the optimal route entirely to PRSAs – and hence why all clients that we work with have moved to PRSAs.

This makes it particularly advantageous for directors of a business to contribute cash from the business into a PRSA for themselves or for any highly valued/loved employee!? It now allows for these monies to be fully and legitimately removed from the business, and into your name (or the name of any employee, even related ones!) within a regulated tax-advantaged and regulated PRSA pension structure.

However, there appears to be a lot of political negotiation on removing this potentially ‘unlimited’ scope for tax-free contributions, and reverting back to old Revenue maximum calculations. If it does happen, do they revert back to the old means of calculating how much a company can contribute? This old ‘revenue maximum calculation’ still allowed for fairly generous contributions. It was an actuarial calculation based on age, length of service, proposed retirement age, existing pension benefits and salary level. The more you paid yourself, the more the company could contribute. And seeing as many business owners don’t like to take large salary (and pay large level of tax), this was a constraint for many.

If owners or businesses want to make large contributions to their owners or employees pension schemes, it does seem like the window is closing on the current opportunity. We don’t know for sure that it is – but it’s one that many won’t want to look back in anger on, if it does change!

Will the rates of Exit Tax (41%) and CGT rate (33%) be adjusted, on profits from investments?

This one has long been called-for. There is often quoted as being unfair and archaic, that CGT is 33% while Exit Tax is 41%.

If you make an investment in shares for example, and subsequently realise a gain, you’ll pay 33% tax on that gain.

If you make an investment in insurance company products or Irish domiciled funds for example, and subsequently realise a gain, you’ll pay 41% tax on that gain. Plus, you’ll be obliged to pay a deemed disposal tax (as if you had sold them) every 8 years, even if you don’t. It is an unequal treatment of two very similar routes. Equalising the rates would go a long way to simplifying the investment planning landscape for people, and removing confusion and complexity.

Based on my own research, on balance, the vast majority of investors are usually better-off taking an optimal ‘Exit Tax’ approach over a sub-optimal ‘CGT’ approach – depending on their circumstances and the situation. It harks back to the ‘don’t let the tax tail wag the investment dog’!

Some say that the Budget will/should reduce the 41% to 33%, so that it an equal playing field. But there are other ways they might equal it, if they choose to do so. Could they change both to 41%!? Particularly if they are having a give-away budget in other areas?? Or would they move both to the middle, say 35% or 37%?? Who knows, but an equalisation would certainly make things a little clearer for all.

Will the tax free thresholds for inheritance tax be increased?

3 months ago a kite was flown to suggest that the Capital Acquisition Tax (CAT) threshold for a child would be reduced from €335k to €200k. More recently, it’s been flown that it will be increased! Who knows what they”’ do with this one!

The current Group A (child) threshold is €335,00. Anything gifted or inherited above that level in a child’s lifetime from parents is taxed at 33%. Up until 2020 (Covid), the government were very clear in increasing this threshold back up to €500k. They had started to bump it back up, and for obvious reasons, that was put on ice in 2020. Will we see it on the move back up again soon? We hope so.

If one was fearful that they might reduce it – and they have the cash and desire to do so, there is nothing to stop them from maximising the current 335k level before Budget. If the threshold is subsequently increased in later years, and you are alive and plentiful, you can maximise the threshold at a later date.

Oh, and important to note the need for anyone who received 80% + of their threshold, to do a return to Revenue to declare it (IT38 Form). There is no tax to be paid if it is below the threshold, but Revenue do want to be notified!

Conclusion

Will you be enjoying a Champagne Supernova on Budget Day, or will we be Crying Your Heart Out??

I hope it is the former! And I hope that if there is any action that could benefit you prior to Budget, that this piece prompts you to explore it, and help avoid possible regret and missed opportunity for you and your future selves.

Don’t look back in anger…..

Paddy Delaney QFA RPA APA

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