As an employee, each week tax is taken from your pay and you just accept it. As an employer, you pay employers prsi and you just accept it. But is what you are paying calculated correctly and did you know that sometimes an increase in pay actually means you take less home?

Here is how your pay is made up in the eyes of the employer

The above shows the cost of an employee to a business

1. If the employer pays into a pension fund for an employee, there is no tax or prsi payable on 
it. It is still money the business must pay out. The employee does not see any benefit in 
their pocket immediately as pensions are a long term investment.
An employee could argue for the pension being made part of taxable salary so that he could 
receive immediate beneift. The benefit would only be after tax and prsi is deducted and the 
employer would have to pay employers prsi of up to 10.75% on the amount that would have been 
prsi free if it where a pension amount.

Comparison example showng tax saved and extra tax paid, with pension/without pension

Employer pays into a pension fund for employee

Employee takes pay as salary instead of pension

Where did the eur100 salary taken instead of a pension go?

Note: The tax man got 52.13 of the 100

2. Employer Prsi
This is paid on taxable income and as an approved pension is not taxable this is to the 
benefit of the employer. If an employee was willing to take a reduction in their salary of 
Eur90.30 their take home pay would be reduced by 47.87 but their employer could afford to 
pay Eur100 into their pension fund and it would cost the employer nothing extra.

3. Benefit in kind
Benefit in kind was introduced to stop people avoiding paying tax. Items other than money 
were paid to the employee and were initially not taxable. But now what happens is that the 
value of the item given to the employee is deemed as income and taxed accordingly.
So if health insurance (VHI Eur1000) is paid by the employer, then for tax purposes 1000 is 
part of the gross salary and tax, ee prsi and er prsi must all be calculated on this amount.
If a company car is provided, the list price of the car is used. 
So if the car cost 30,000 the taxable amount is 30% of this value which is 9,000 in this 
case. The 9,000 is deemed as taxable income. So you have;
Tax eur9000 @ 41%
Ee Prsi eur9000 @ 6%
Er Prsi eur9000 @ 10.75%

4. Gross Salary
This is the salary for the job excluding any other benefits. So when a job is advertised as 
40,000 this is the amount excluding pensions, company cars, vhi etc. Commission and bonuses 
are dealt with in the same way as gross salary. Commission and bonus are not benefit in 
kind, they are salary paid in a different way. Instead of being paid an hourly rate or a 
monthly salary, you are paid a basic + commission = Gross Salary and are taxed accordingly.

Think about how someone is paid.

As an employer, you should understand that the way in which you pay an employee can either 
increase or decrease your cost of employing an employee.

• Pensions reduce tax both for the employee and the employer.

• Benefit in kind increases tax both for the employee and the employer.

• Getting that balance of cost versus benefit versus paying unnecessary tax is important

As an employee, you could be paying tax unnecessarily. While a pension is a long term 
investment, a small decrease in your net pay could result in a doubling in the monetary 
benefit to you.

Never forget employer's prsi of between 8.5% and 10.75% must be added to the cost of 
employing a person. So next time increases are discusses, think about a decrease in gross 
pay but increases in other benefits.

Article no.100008
copyright nilsson denver (2007)