Auto-enrolment: Tax and compliance guide for Irish employers

Cost structure and financial impact

Contribution schedule over ten years

All contributions capped at €80,000 gross annual salary

Cost impact by business size

The phased structure provides adjustment time, but the Year 4 doubling represents a significant step change that may catch many businesses unprepared. By Year 10, auto-enrolment permanently adds 6% to payroll costs – equivalent to adding three extra days of employment cost per employee annually.

Tax implications

Corporation tax treatment

Employer contributions are fully deductible for corporation tax purposes, matching the treatment of traditional occupational pension contributions. For companies paying corporation tax at 12.5%, this reduces the effective cost of a €100,000 annual contribution to €87,500. However, cash flow timing differences between contribution payments and tax relief require careful management.

Employee tax position

The employee contribution structure differs fundamentally from traditional pension tax relief.

• Contributions are deducted from net pay after income tax, USC, and PRSI, but the contribution rate itself is calculated on gross pay – for example, 1.5% of €3,000 gross equals €45, which is then deducted from the employee's net pay
• The state adds €1 for every €3 contributed by employees
• This represents approximately 33% additional funding but operates differently from marginal rate relief
• No tax relief is available on employee contributions
• The state contribution is not subject to income tax when paid

The comparison with traditional pension relief is complex because the mechanisms differ fundamentally. With traditional pensions, contributions reduce taxable income, providing relief at the marginal tax rate. This different structure means the relative value varies by individual circumstances and cannot be directly compared.

Directors and shareholders

Company directors' participation depends on PRSI classification:

• Directors with controlling shareholdings (typically 50%+) pay Class S PRSI and are not subject to auto-enrolment
• Directors without controlling interests may pay Class A PRSI and be enrolled if meeting eligibility criteria

Director PRSI classification can be complex, particularly where shareholdings are held indirectly or through family members. Professional advice may be needed to confirm classification.

Compliance framework and penalties

Mandatory obligations

Every employer must:

• Process AEPNs accurately when received from NAERSA
• Calculate employee and matching employer contributions from gross pay
• Remit combined total to NAERSA with each payroll run
• Update payslips to show auto-enrolment deductions
• Maintain comprehensive records for Revenue inspection
• Provide employees with scheme information

Penalty structure

The Automatic Enrolment Retirement Savings System Act 2024 creates significant sanctions:

Beyond financial penalties, reputational damage from prosecution affects recruitment, retention, and business relationships. The Workplace Relations Commission has powers to investigate complaints and order compensation.

Existing pension schemes: The compliance complexity

Parallel scheme operation

Many employers may be required to operate a PRSA and/or an occupational scheme simultaneously, creating dual administration requirements:

• Different contribution structures and rates
• Different eligibility criteria and waiting periods – auto-enrolment has no waiting period, creating situations where new employees on probation may be excluded from occupational for six months but must be immediately auto-enrolled if they meet the eligibility criteria
• Multiple provider relationships and portals
• Distinct reporting and reconciliation processes

Year 7 minimum standards

NAERSA will publish minimum standards by Year 7 that existing schemes must meet to maintain exemption. Schemes not meeting these standards will lose exempt status, forcing all employees into auto-enrolment regardless of existing provision. This creates uncertainty for long-term pension planning and may require scheme restructuring.

Payroll system requirements

Technical capabilities needed

Common implementation issues

The calculation requirement may present challenges for businesses, particularly those with irregular pay elements such as overtime, commissions, or variable bonuses.

Bonus payments create particular challenges. A €10,000 bonus in March generates immediate additional contributions of €150 (Year 1) to €600 (Year 10) for the employer, with corresponding employee deductions. Systems must handle these calculations automatically while maintaining the €80,000 annual cap.

Manual processing through NAERSA's employer portal provides a fallback but creates reconciliation challenges and increases error risk. Businesses discovering system limitations in December face limited options for resolution before January.

International employees

Foreign employees on Irish payroll fall within auto-enrolment scope even if participating in home country pension schemes, as foreign arrangements rarely qualify as "exempt employment" without Revenue approval. For employers operating tax equalisation policies, auto-enrolment contributions increase assignment costs and add complexity to equalisation calculations. Short-term business visitors and expatriates may qualify for PAYE exclusion where certain conditions are met, which also excludes them from auto-enrolment. Irish employees working abroad with a PAYE Exclusion Order (PEO) are outside scope during the PEO period.

Implementation timeline and checklist

December 2025 implementation checklist

With less than one month remaining, these critical actions cannot be deferred:

System readiness

• [ ] Test payroll system with sample AEPN scenarios
• [ ] Confirm system can handle dual calculation (net for employee, gross for employer)
• [ ] Set up NAERSA employer portal access
• [ ] Establish variable direct debit mandate with NAERSA

Employee communications

• [ ] Prepare communication about contribution rates and eligibility
• [ ] Explain opt-out restrictions (cannot opt out for six months, then months 7-8 only)
• [ ] Create payslip messaging for auto-enrolment deductions

Compliance documentation

• [ ] Document all processes for Revenue inspection
• [ ] Review director shareholdings and PRSI classifications
• [ ] Review expatriate population for eligibility, exemption etc.
• [ ] Calculate Q1 2026 cash flow requirements
• [ ] Brief payroll team on compliance requirements

January 2026: Live operation

• First AEPNs arrive with January payroll – process immediately (no grace period)
• Monitor system performance and reconciliation
• Handle employee queries about mandatory participation
• Prepare for first remittance reconciliation

Ongoing compliance requirements

• Monthly: Process AEPNs and remit contributions with payroll
• Months 7-8: Manage opt-out windows for each enrolment cohort
• Annually: Budget for contribution rate increases
• Year 4: Prepare for contribution doubling (1.5% to 3%)
• Year 7: Review compliance with NAERSA minimum standards for existing schemes

Summary

Auto-enrolment implementation is now an operational imperative with immovable deadlines and substantial penalties for non-compliance. While NAERSA handles eligibility determination and investment management, employers carry full responsibility for accurate contribution processing and statutory compliance.

The scheme's tax treatment provides corporation tax relief on employer contributions but offers employees a different value proposition than traditional pension tax relief. This creates complexity in organisations with existing schemes and mixed-rate taxpayers.

Success requires immediate action on system readiness and cash flow planning for permanent cost increases. Professional advice may be valuable for complex situations, particularly regarding existing scheme decisions, director classifications, and internationally mobile employees.

The long-term impact extends beyond compliance to fundamental business economics. By Year 10, auto-enrolment represents a permanent 6% increase to employment costs that cannot be avoided, deferred, or negotiated. Businesses that plan systematically for this reality will adapt successfully. Those that treat each contribution increase as a surprise will face mounting pressure on margins and competitiveness.

This guide addresses tax and compliance aspects of auto-enrolment implementation. For pension advisory matters including scheme comparisons or investment decisions, consultation with qualified pension advisors is recommended. The interpretation of certain legislative provisions continues to develop, and professional advice should be sought for specific circumstances.