Potential PRSI changes to share awards could lead to increased payroll costs - Gearóid Deegan (IPSA Newsletter, August 2010)

Irish Pro-Share Association (IPSA) Pre Budget Submission
By Gearóid Deegan
First published in IPSA Newsletter August 2010
Reproduced by permission

The IPSA Pre-Budget Submission is framed in the context of the current challenging economic environment, recognising that Exchequer resources are limited. However, arising out of proposals contained in the Commission on Taxation Report and the probability of certain changes to the PRSI system, as announced by the Minister for Finance, employers should be aware of the significant changes which could arise if these proposals were implemented.

In summary, the Commission on Taxation proposed last September that all employee share based remuneration should be liable to PRSI in the same way as cash remuneration. Employers will be aware that under current rules no PRSI is payable on share based remuneration, either for Revenue approved or unapproved employee share schemes.

The Minister for Finance subsequently indicated that it is his objective to introduce in 2011 a “new universal social security contribution which will replace employee PRSI, the Health Levy and the Income Levy. It will be paid by everyone at a low rate on a wide base as a collective contribution to public services.” The need to broaden the base clearly means that share based remuneration could potentially fall within any new universal social security contribution.

The combined effect of these proposals, if implemented, is that employees might become liable to pay PRSI on share awards, some of which may currently be exempt from both tax and PRSI. More significantly, it is likely, given any broadening of the PRSI base, that employers would then also become liable to pay the employers PRSI contribution. If one considers the aggregate value of shares which might be delivered to employees in an organisation in any year, the addition of an employers PRSI cost (currently at rates of almost 11%) would represent a significant increase in payroll costs.

Such additional costs would clearly not have been budgeted for; this at a time when there are considerable economic pressures to reduce overall payroll costs and increase competitiveness. Based on soundings from employers it is clear that the removal of the current exclusion from a social security charge would cause many existing companies to reassess the cost effectiveness of such arrangements and is also likely to discourage new organisations from rolling out broad based employee share schemes in the future. This is not a desirable outcome and would undo much of the progress which has been made as part of the partnership approach over the years.

Having regard to all these factors, the IPSA Pre-Budget submission has focused on calling for retention of the existing exclusion of share based remuneration from social security charges. This would underpin the Governments stated commitment to encouraging employee share ownership, stop any further increase in the tax wedge and avoid any incremental increase in employment costs at this critical time for many organisations.

Of the two other elements in the IPSA submission, one is linked to the National Pensions Framework (NPF) and, given the economic situation, is a medium term objective. The intention here is to frame a case to facilitate the tax efficient transfer of employee share awards to Revenue approved pension arrangements. In other words, that employees could transfer shares acquired through their employment to their pension scheme, without triggering a tax charge at the point of transfer. Similar arrangements have already been implemented in the UK and are working successfully.

On a related issue it seems sensible that pension scheme trustees would also be enabled to facilitate a diversification of scheme assets so as to properly manage the investment risk. In addition, given that the transfer of shares to the pension scheme would amount to an employee contribution to their pension scheme, the question of any associated tax relief or credit for such contributions also needs to be considered in the context of the proposals in the NPF. In this regard IPSA has also made separate representations to the working group which has been set up to look at the implementation of the NPF proposals.