Starting in September, employers must navigate pension auto-enrolment (AE) obligations. KPMG experts Joanne Roche and Thalia O’Toole explore the pension and tax issues, while Aoife Newton of KPMG Law LLP writes about the legal implications, helping employers manage the potentially complex administrative requirements.
WHAT IS THE AE SCHEME?
The scheme provides a financial retirement plan for employees who are not already part of a pension-related regime.
The scheme will not apply to those in ‘exempt employment’ i.e., where contributions (either employee or employer contributions) are being made to a qualifying occupational pension scheme (OPS), qualifying Personal Retirement Savings Account (PRSA), qualifying trust Retirement Annuity Contract (RAC) or qualifying panEuropean Pension Product (PEPP) and the employer is obliged under PAYE regulations to include details of those contributions on the monthly statutory payroll return.
A qualifying pension arrangement is generally one which has Irish approved status with Irish Revenue.
HOW WILL IT WORK?
The scheme will commence 30 September 2025, and employees will be automatically enrolled if they are between the ages of 23 and 60; earn more than €20,000 per year; and are not in ‘exempt employment’.
Employees aged 18 to 23 years, and 60 to 66 years who are not in ‘exempt employment’ may voluntarily opt into the AE Scheme.
Employees will be able to opt-out of the AE Scheme during various opt-out windows.
These are generally between 6 months and 8 months of the date they were automatically enrolled.
Employees may also be periodically re-enrolled for a number of reasons, meaning an opt-out notification may need to be considered again by the employee.
TAX MATTERS CONNECTED TO AE
Many tax measures have now been established through Finance Act 2024 (FA 2024).
While FA 2024 was passed into law in late December 2024, the specific tax measures relating to AE covered by FA 2024 remain subject to a commencement order by the Minister for Finance.
Tax measures announced to date include the following areas:
■ Employee contributions payable under the AE scheme will not be eligible for income tax relief. State top-up contribution (which will be provided instead of tax relief on employee contributions) will not be treated as income of the employee for tax purposes.
■ A corporate tax deduction should be available for employer AE contributions paid for a contributing participant.
■ Employer AE contributions will not be taxed as a benefit in kind on the employee.
■ Income and gains derived from investments will be exempt while held in an AE provider scheme.
■ The AE Scheme will be viewed as a “relevant pension arrangement” which means
● the fund value should be aggregated with the value of all such pensions arrangements of the individual to assess whether or not the Standard Fund Threshold (“SFT”) has been breached at the relevant time, e.g. retirement, with the excess aggregate value above the relevant SFT considered taxable.
● Lump sum taken from the AE fund must be aggregated with lump sums taken from other such arrangements when considering the lifetime tax-free limit available (currently €200,000). Although the SFT limit is set to increase incrementally over the next few years, the inclusion of the AE Scheme in SFT provisions may impact some employees who choose to opt-out of employer pension schemes to manage tax issues associated with breaching the relevant SFT.
Such individuals would be auto-enrolled in AE as a consequence of no longer having qualifying pension contributions paid through Irish payroll.
To avoid being impacted by a potential excess SFT charge or on a future taxation of lump sums, these individuals will need to manage AE opt-out windows under the new scheme.
In addition to domestic employees, a number of cross-border considerations arise in relation to AE, including:
■ Employees of a foreign company working in Ireland and subject to Irish payroll withholding on related employment income will be in scope of AE even where a member of a foreign pension scheme.
This is because the current definition of an ‘exempt employment’ would not cover foreign pension arrangements unless formal tax approval has been sought from Irish Revenue for that scheme.
As many foreign employers cover the incremental Irish tax costs for expatriates to Ireland under a tax equalisation policy, these contributions will increase the cost of such assignments and the employer will need to ensure the employee meets all the relevant opt-outs period in order to manage such costs.
■ Not all foreign employees working in Ireland are in scope of Irish payroll — an exclusion from Irish payroll reporting is possible for certain Short Term Business Visitors and expatriates spending typically less than 6 months in Ireland in a tax year.
However, employers are required to make a PAYE Clearance application for eligible employees spending more than 60 workdays in Ireland in a tax year to avoid PAYE obligations (and potential AE contributions) falling due.
■ Non-resident employees of an Irish company working overseas for whom an Irish PAYE Exclusion Order (PEO) has been obtained by the employer so that no Irish payroll withholding need be deducted should be outside of AE for the duration of the PEO period.
This exclusion from AE arises as the meaning of “gross pay” under the Act are those emoluments to which Chapter 4 of Part 42 of the Taxes Consolidation Act 1997 applies. A PEO disapplies this chapter.
■ Where an Irish employee is working overseas, contributing to AE and liable to foreign tax on employment income, the treatment of the AE Scheme overseas should be considered.
It could be the case that the employer and/or State contribution as well as any investment returns arising annually within the AE fund are treated as taxable income in that location.
This may require an employer to tax-protect the employee on such foreign tax costs.
OFFENCES AND FINES
The AE Act provides for a number of offences, some of which can attract a fixed penalty of up to €5,000.
Offences such as failing to pay contributions or deducting contributions from an employee’s gross pay but failing to pay the corresponding contribution within the prescribed time, will lead to the employer having to pay National Automatic Enrolment Retirement Savings Authority (NAERSA) the amount they failed to pay with interest.
Certain other offences will attract, on summary conviction, a class A fine or term of imprisonment not exceeding 6 months (or both), and on conviction on indictment, a fine not exceeding €50,000 or term of imprisonment not exceeding 3 years (or both).
HOW CAN EMPLOYERS PREPARE?
Employers need to consider which of the three broad possible options they favour below and what they need to do to action these options.
1. Provide no employer-based pension arrangement and operate the AE Scheme once commenced.
2. Continue to provide existing pension related benefits and adopt the AE Scheme on commencement for those outside of the existing benefits.
3. Endeavour to determine all employees as ‘exempt’ under the AE Act by having it as a condition of employment that all employees must be active members of an occupational pension scheme or PRSA (or contribute to a RAC or PEPP).
Globally mobile employees may add additional complexities to the AE arrangements.
Employers should review their arrangements carefully to manage AE contribution obligations, opt-out facilities and relevant PAYE cessation applications (which can impact AE obligations).
Support for executives who are monitoring SFT thresholds carefully should also be considered. It would be important to manage the taxation impact of AE membership on SFT and tax-free lump sum provisions.
HOW WE CAN HELP
As part of their planning employers will need to engage with a variety of stakeholders such as payroll providers, trustees of the existing pension plan, pension plan providers or administrators and possibly also insurers depending on whether any of their decisions have a bearing on risk benefits.
Our teams in KPMG and KPMG Law LLP can assist with the most appropriate pension, tax, and legal advice on the best way to be prepared for auto-enrolment and its impact on reward programmes, HR, and fi nance functions.
Visit kpmg.ie or kpmglaw.ie for more information.
Photo: Thalia O'Toole KPMG
