Pensions
which is contained within Section 118B of the Taxes Consolidation Act. This says that the sacrifice is treated as ‘an application of the employee of their taxable remuneration rather than an employer expense’ – meaning that it will qualify for income tax relief within the employee’s ordinary maximum relief limits. Any sacrifice, however, will not reduce gross salary for the purposes of the other two payroll taxes of universal social charge and pay-related social insurance. Ireland is currently contemplating the introduction of an AE style regime after commissioning a report from the Organisation for Economic Co-operation and Development in 2015, which recommended such an approach. Subsequent Irish governments have delayed implementation but have broadly indicated a system like that in the UK. An ultimate contribution rate of 6% for both employee and employer, phased in over a ten-year period has been suggested, with mandatory enrolment commencing at age 22 for those earning over €20,000. Recently, the government decided to commission a review on the suggested vehicle for such pensions savings, and as well as allowing savings with the traditional pensions and insurance companies, is considering the creation of a state-sponsored investment vehicle to be known as a special savings incentive account. Further details are expected to be released during this year.
And here is where the payroll fun starts. The employee’s contributions are potentially free of both tax and social security, subject to certain limits, which use the annual social security ceiling of €41,136 as a reference. The relief is available as follows: For social insurance contributions, whichever is higher of: ● 5% of the annual social security ceiling, or ● 5% of total gross annual remuneration. For income tax: ● 8% of total annual gross remuneration, ● but limited to no more than 8% of eight times the annual social security ceiling. Likewise, employer contributions to the supplementary retirement schemes may also be provided free of tax and social insurance, to different limits. These are that the employer contribution must not exceed: ● 6% of the amount of the annual social security ceiling, and ● 1.5% of the remuneration subject to social security contributions. The total cannot exceed 12% of the annual amount of the social security ceiling. Any excess contributions made by the employer must be considered as a benefit in kind and subject to deductions via payroll. There is, therefore, a significant payroll task to be performed every December to run these checks on each contributing member’s record. If any employee or employer contributions have been made over the maximum limits, an equivalent amount must be processed via payroll to ensure the necessary taxes are settled.
industry-wide schemes. Take the retail trade for example. Any business who has at least 50% of their business activities covered by the retail sector agreement has to enrol employees over the age of 20 in the retail pension scheme. In UK terms, this would mean Tesco, John Lewis and Currys all offering the same pension arrangement to their staff. The concept of several different employers coming together to provide a pension scheme is ordinarily only found in the public sector in the UK. But the arrangement offers great economies of scale for all employers in the sector, which in turn, can drive the provision of better benefits to scheme members. Just how many Big Macs will the monthly minimum pension buy in a country? At £3.39, the UK state pension buys around 229 Big Macs in a month
Norway
France
The Netherlands
Norway runs a similar AE regime to the UK, with contributions of 2% and 4% due from employer and employee respectively. What makes the Norwegian system interesting is its approach to those leaving service. Since 2021, Norway has operated a ‘pot follows member’ policy, known as the separate pension account. The policy applies to all private sector employers operating a defined contribution scheme and requires all employers to collect the previous pension funds accrued and to manage them. On termination of employment, the old employer issues a pensions capital certificate which is collected by the new employer. The employee doesn’t have to accept a compulsory transfer of funds and has a
France provides one of the most generous state pension schemes in the world, with several different levels of support broadly equating to a final salary scheme based on half pay. But there’s also the possibility of additional supplementary contributions being available. These might be targeted at aspects of the retirement scheme – for example, as well as boosting the age pension they may also provide enhanced survivor and orphan benefits. The requirement to make these contributions may be a mandatory condition of a relevant collective bargaining agreement, with the contributions split between the employee and employer.
The impact of collective bargaining agreements with national application can also drive pension scheme membership. Consider the position in the Netherlands, where the state pension is equivalent to 70% of the monthly minimum wage, and thus some form of supplementary provision would be needed for a comfortable retirement. There’s no equivalent of AE, but around 90% of the Dutch workforce are in some form of occupational pension plan. One interesting feature is the existence of
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| Professional in Payroll, Pensions and Reward |
Issue 79 | April 2022
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