With pension auto-enrolment (‘AE’) obligations commencing in September of this year, employers will need pension, tax, and legal expertise to guide them through the new regime and ensure compliance with what may be a complicated administrative burden for some.

What is the auto-enrolment scheme (‘AE Scheme’)?

The Automatic Enrolment Retirement Savings Systems Act 2024 (‘AE Act’) as signed into law in July of 2024, establishes a new retirement savings scheme known as ‘My Future Fund’. The AE 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, qualifying Personal Retirement Savings Account (‘PRSA’), qualifying trust Retirement Annuity Contract (‘RAC’) or qualifying pan-European Pension Product (‘PEPP’) and the employer is obliged under PAYE regulations to include details of those contributions on the monthly statutory payroll return.

Initially, there will be no minimum standards (including contribution rates) applicable to exempt employment related schemes, however, the AE Act provides for this within a 7–9-year period of the commencement of the new regime.

A commencement order was signed on 30 September 2024 providing for the AE Scheme to commence on 30 September 2025. Once commenced, 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 18-23, and 60-66 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 the opt-out window which is between 6 months and 8 months of the date they were automatically enrolled (or re-enrolled).

In availing of the opt-out window, employees will be refunded their own contributions since enrolment but  the employer or State contributions will remain for their benefit in the fund. The opt-out window will also apply after a change in contribution levels; however, the refund of the participant contributions will be limited to the contributions they made since the rate change.

Employees will be able to suspend their contributions for up to two years from 6 months after enrolment, re-enrolment, or a period of previous suspension. Similarly, a period of suspension can be terminated on any date before the end of the set two-year period by way of notification. Employer and State contributions also cease during any suspension period.

The operation of the AE Scheme

The AE Scheme will be run by a new government body called the National Automatic Enrolment Retirement Savings Authority (‘NAERSA’) to be established with effect from 31 March 2025. The functions of NAERSA are broad, ranging from establishing, maintaining, and controlling the AE Scheme, to arranging for the investment of contributions with investment management providers.

The AE Act provides for the composition of NAERSA including the establishment of a board and related committees. By way of example of the focus of NAERSA, one such committee, the investment committee, shall be tasked with monitoring the performance of the AE provider schemes. The Pensions Authority will be the oversight body and will provide supervisory reports on the operation and performance of NAERSA.

One of the main tasks of NAERSA will be to notify employers of the need for certain employees to be enrolled in the AE Scheme. The data for this notification will be based on payroll data provided by employers to the Revenue Commissioners.

Once notified, employers will have an obligation to facilitate the enrolment of eligible employees and commence contributions. AE contributions will be phased in over a decade, with both employer and participant contributions starting at 1.5% and increasing every three years by 1.5% to a maximum of 6% by year 10.

The State will contribute a corresponding one third of employee contributions (or €1 for every €3 contributed by the participant), with all contributions calculated up to a maximum gross salary of €80,000.

Employee contributions made under the AE Scheme will not qualify for income tax relief however, the contribution made by the State indirectly compensates for this and corresponds to relief equivalent to 25%, reflecting the State contribution of €1 for every €4 invested from the employee and State combined.

The AE Scheme aims to provide access to benefits at the State Pension age (currently 66). The value of the benefits will depend on several factors including the risk level of the investment which will range from lower to higher risk as selected by the employee or by default, this will be apportioned depending on the employee’s age range.

For example, a higher risk level investment strategy will be applied to funds in respect of employees with 15 years before the State Pension age i.e., based on the current State Pension age, this is age 51.

The AE Act provides that in the event of the death of an auto-enrolled employee, their personal representative can apply to NAERSA to access the balance in the employee’s investment account for distribution as part of their estate. Early payment of the employee’s investment will also be possible in the event of incapacity or exceptional ill-health.

Tax matters connected to AE

The AE Act does not specifically address a number of tax matters associated with the AE Scheme. Many of these have now been established through Finance Act 2024 (“FA 2024") by the introduction of a new Chapter 2E in Part 30 of the Taxes Consolidation Act 1997 as well as some other consequential amendments.   While FA 2024 was passed into law in late December 2024, the specific FA 2024 tax measures relating to AE 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. In addition, any lump sum taken from the AE fund must be aggregated with lumps 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 will be auto-enrolled in AE as a consequence of no longer having pension contributions paid through Irish payroll. To avoid future potential excess SFT charges or impacts on future lump sum taxation, the individuals will need to manage new SFT thresholds as well as relevant AE opt-out windows under the AE scheme. 

Cross-border matters

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” only covers arrangements where contributions are made through payroll to an Irish approved occupational pension scheme, qualifying PRSA or qualifying PEPP.  Foreign pension arrangements do not generally meet this definition unless formal approval has been sought from Irish Revenue in relation to same.  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. As employers are required to make a PAYE Clearance application for eligible employees spending more than 60 workdays in Ireland in a tax year, it is critical that these employees are tracked and relevant applications are made timely to avoid PAYE obligations (and potential AE contributions) falling due. 
  • Non-resident employees of an Irish company working overseas and for whom an Irish PAYE Exclusion Order (“PEO”) has been obtained by the employer should be outside of AE for the duration of the PEO period.  A PEO can be obtained to confirm no Irish payroll withholding need be deducted through Irish payroll. 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 performs duties only partially in Ireland, it can be possible for an employer to obtain a PAYE Direction from Irish Revenue to limit Irish payroll withholding to the income related to the relevant Irish sourced portion. As the foreign-sourced portion of such earnings are outside of PAYE withholding, this would suggest this portion of earnings could be outside of AE contributions.  It remains to be seen what guidance from Irish Revenue issues in this respect and how NAERSA will implement this in practice.
  • Where an Irish employee is working overseas, remains within the AE scheme but is liable to foreign tax on employment income, the foreign treatment of the AE Scheme should be considered. It could be the case that the employer and State contribution as well as any investment returns arising annually within the AE fund are treated as taxable income in that location i.e. the arrangement is not recognised as a tax-exempt arrangement there. The employer may be required to tax-protect the employee in relation to such additional host liabilities.
  • At retirement, distributions of AE funds (after any lump sum taken) to a participant will be treated as taxable employment income through the PAYE regime by NAERSA. As currently drafted, FA 2024 rules provide that PAYE should apply to such distributions even if the recipient is not Irish resident at time of receipt. In general, where living in a tax treaty location at time of drawdown of pension annuity income, the new home location usually has primary taxing rights on such income and Ireland should cease to tax. It remains to be seen if the participant would be required to formally purchase an annuity with AE funds (once the AE scheme permits such a purchase) to avoid ongoing Irish payroll tax liabilities on such payments where not resident in the future. 

Sanctions & offences

The AE Act provides for a number of offences, some of which can attract a fixed penalty of up to €5,000. Compliance Notices can also be issued by NAERSA where an authorised officer is satisfied that there has been a contravention of a relevant provision.

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 NAERSA the amount they failed to pay with interest (calculated in accordance with the Act).

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). NAERSA might also take legal action on certain matters including applying to court for an order requiring an employer or an employee to pay arrears of contributions.

Employers will be prohibited from penalising or threatening penalisation against an employee for participating or proposing to participate in the AE Scheme. Penalisation includes suspension, lay-off or dismissal (including a dismissal within the meaning of the Unfair Dismissals Acts 1977 to 2015), or the threat of suspension, lay-off or dismissal, demotion, or loss of opportunity for promotion or withholding of promotion.

Claims in respect of penalisation (which will be heard by adjudication officers of the WRC and on appeal, the Labour Court) and could result in a direction to an employer to: facilitate the employee’s participation in the AE Scheme; require the employer to pay any contributions due for that employee from the date they should have been enrolled: mandate the employer to rectify any contraventions of the legislation; award compensation in favour of the employee (up to 4 weeks’ remuneration); or, a combination of such directions.

What should employers do now?

While the AE Scheme is a significant change to pensions in Ireland, employers can continue to facilitate access to their occupational pension schemes and/or PRSAs, and in parallel to this, respond to the AE obligation on commencement.

However, it may be prudent for employers to act in terms of performing business and workforce impact analysis i.e., assessing their workforce by age, salary, and current retirement arrangements, including the costs associated with contributions, administration of existing schemes and any mobile employee aspects to be considered.

This analysis will help determine if it is possible to extend existing arrangements to all employees and whether employers should pro-actively encourage or entice employees with no financial retirement arrangements to avail of existing pension related benefits.

The AE legislation will not immediately affect membership requirements or benefits under existing schemes, nor will it create any obligation on employees to avail of existing schemes. However, with the expected rollout of the regime in September 2025, it is timely for employers  to consider which of the three broad possible options they favour below and what they need to do to action these options in relation to their domestic employees.

  1. Provide no employer-based pension arrangement and operate the AE Scheme once commenced. For employers who do not provide pension related benefits, the AE Scheme will become operational, and they will respond to notifications from NAERSA to facilitate the scheme. Costs associated with this approach including the new employer contribution rates will need to be assessed, budgeted, and accounted for. Payroll providers will need to be in a position to deduct and facilitate the remittance of contributions to NAERSA.
  2. Continue to provide existing pension related benefits and adopt the AE Scheme on commencement for those outside of the existing benefits. This would be considered as a ‘dual approach’ which may be the most common position employers find themselves in, noting that this approach will lead to different administration, costs, and levels of benefits between two (or more) schemes and two (or more) cohorts of employees.
  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 an RAC or PEPP). This approach may be open to new employers who can determine this as a term of employment from the outset and will not need to entice or encourage employees into an existing scheme or a new section of an existing scheme. For existing employers whose schemes may be limited in terms of access based on age or service requirements, this option may not be available to the employer or attractive to the employee whose consent will be required for the deduction of any participant contributions.

Globally mobile employees may add additional complexities to the AE arrangements. Employers should now review their arrangements carefully to ensure that the AE contributions obligations as well as opt-out facilities are known and tracked. Further, where applications to Irish Revenue are needed to avoid Irish PAYE withholding on some or all of the earnings to be recorded in Irish payroll, these applications should be made timely with end dates tracked carefully.  

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.

Administration costs, levels of contributions, rules of existing schemes, taxation differences between the systems and employee engagement matters are all going to feature in the analysis of the options above.

In addition, 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. 

How we can help

We recommend employers contact KPMG to get the most appropriate pension, tax, and legal advice on the best way to be prepared for AE and its impact on reward programmes, HR, and Finance functions.

Please contact our team below if you have any queries on the pension auto-enrolment scheme.

Discover more in People Services