Most Tax Efficient Ways to Pay Yourself as a Director & Extract Company Profits

Setting up a business is far from straightforward.  As well as all the hard work and time it takes to build up and manage a profitable company, there is also a lot of risks for business owners.  Once the business starts turning a profit, company directors should be rewarded and start turning their attention to ensuring the profit accruing within the business begins to filter into personal wealth.  With the right financial planning advice, you can ensure your business is working for YOU.

 

Director Salary

While it might be tempting to forgo a regular wage during periods of tight cashflow, particularly in the early stages of business, paying yourself a salary is crucial for several important reasons:

Claiming Tax Relief: Important tax advantages like Retirement Relief and Entrepreneur Relief are specifically available to working directors. A documented history of regular salary payments helps demonstrate your active role in the company, supporting your eligibility for these valuable reliefs.

Social Welfare Benefits: Regular PRSI contributions through your salary ensure eligibility for various social welfare benefits, including your future state pension entitlements.

 

Transferring Company Profits into Pension

One of the most tax-efficient ways to extract profit out of a business is by way of a company pension. Directors can avoid immediate tax liabilities by transferring profits into a pension.

Utilising an Occupational Pension or Personal Retirement Savings Account (PRSA), allows business owners to maximise their retirement savings while benefiting from tax advantages specific to each arrangement. Integrating this strategy into your overall financial planning for business owners is crucial to ensure long-term financial security.

Tax relief for the company

Contributions made by the company into a Master Trust pension (on behalf of a Director) or PRSA can usually be offset against corporation tax, as these payments are deemed to be a legitimate business expense (subject to revenue limits).

Tax relief for the director

If accrued profits built up in the company are taken out as salary, the director will have an immediate Income Tax, USC and PRSI liability. If instead the proceeds are made as contributions into a pension scheme, the contributions will receive tax relief and will be able to grow tax-free, until such a time when you decide to draw on this benefit. There is also no ‘benefit in kind’ charged on employer contributions to either an executive pension or a Personal Retirement Savings Account (PRSA) - once within revenue limits.

 

Pension Contributions

Individuals have a maximum lifetime limit of €2 million to which they can fund their pension up to, once they have the required salary and years of service.

Personal Retirement Savings Account (PRSA):

Under current rules, Employer contributions are limited to the Gross salary of the director in a given year. There is also the lifetime Standard Funding Threshold which currently stands at €2 million - this has recently been reviewed and is set to be increased to €2.8million by 2029. 

There are limits put in place by Revenue on the level of Personal Contributions that can be made into a PRSA which relate to age and salary, however, it is far more advantageous from a tax point of view to make the contributions directly from the company as there is no PRSI or USC charged which would be applicable on personal contributions.

Occupational Pensions also known as Master Trust Pensions:

Maximum funding calculations are carried out in relation to funding for an executive pension. These are based on salary and service.

It is rare that a client cannot make their desired pension contribution to an executive pension but again, the Standard Funding Threshold needs to be considered.   

The choice between an Occupational Pension Scheme / Master Trust pension and a PRSA will be dependent on your financial plan as there are merits to each product depending on your circumstances.

Funding for a Maximum Lump Sum

A director can also fund for a maximum tax-free lump sum of 150% of their salary once they have more than 20 years of service.

If a director has a salary of €100,000, they can fund a pension pot of €150,000 (150% of salary). This will then be able to withdrawn as a tax-free lump sum.

The pension can be funded from company contributions which as previously explained will in turn reduce the corporate tax liability.

This is often done by directors who haven’t previously had pension funding in place but would like to avail of a tax-free lump sum before they exit the business.

 

Paying Yourself Through Dividends

An individual can be paid through dividends but these will be taxed in the same way as income under Schedule F. There is a dividend withholding tax of 20% deducted at the source, and then a further tax liability will accrue depending on other incomes - this will be the same rate as income tax.

A company can claim corporation tax relief against salary paid as it is a legitimate trading expense, however, this is not the case for dividends as dividends are paid out of after-tax profits.

An individual cannot make pension contributions against dividend income as it is not treated as 'earned income'.

Company Director Tax Benefits

Understanding the tax implications for Irish company directors extends beyond regular income considerations. These key tax reliefs can significantly reduce your tax liability when disposing of business assets or planning your exit strategy.

Retirement Relief

Retirement Relief also needs to be considered in any conversation regarding extracting profit from a business as this might also give rise to crucial tax relief benefits when the day comes that you wish to dispose of the business and extract the value built up in it.

This relief applies where a person aged 55 or more disposes of a farm or business. This must be a qualifying asset.

There are two types of relief available.

• From the 1st of January 2025, if you dispose of your business or farm to your child, and you are 
  • Between 55 and 69, the relief is restricted to €10 million. 
  • 66 or older, the relief is restricted to €3 million.  
• If you dispose of your business or farm to any other person, and you are between 55 and 69 the gain is exempt if the proceeds do not exceed €750,000. There is a lifetime limit of €500,000 if the disponer is aged 70 or over.

Retirement relief is subject to a “bona-fide commercial reasons” anti-avoidance test. This should be discussed as part of the overall retirement planning process and should form part of your estate planning.

It's important to note that retirement relief is just one aspect of comprehensive business estate planning. In Ireland, business estate planning involves strategies to protect and transfer your business assets efficiently, minimizing tax liabilities and ensuring the continuity of your enterprise. This may include succession planning, drafting a will specific to your business assets, and exploring trusts or other legal structures to preserve your business legacy.

Entrepreneur Relief

Entrepreneur relief was introduced to reduce the rate of Capital Gains Tax (CGT) applicable when entrepreneurs sell their businesses. This is to encourage business development and to reward those who take risks in starting up a new venture.

The relief reduces the rate of CGT to 10% (reduced from a normal rate of 33%). This relief only applies to the first €1 million of gains.

There are a number of conditions that need to be met in order to qualify for this relief and it is important to consider the business structure to ensure that nothing precludes the eligibility of such relief. This can is a complicated area and tax advice should be sought before any major corporate restructures, incorporations or introspective transfers take place

FAQs

How are Company Profits Taxed?

There is a 12.5% corporation tax which is applied to all ‘active’ income. This is the income generated from the day to day trading within the business.

There is a 25% corporation tax levied on any income for ‘non-active’ income. This can be income generated from rental properties or investments.

There is also a reduced 6.25% corporation tax relating to profits generated from a usable qualifying asset created from Research and Development (R&D) activities.

How are you taxed as a Director?

Any income you take from the company will be taxed at source under the PAYE system (income tax, PRSI & USC). A director is also noted as a ‘chargeable person’ for income tax purposes and is obliged to submit a director’s income tax return each year.

Directors must also comply with the ‘self-assessment’ regime which means they may be required to make payments on account to meet their preliminary tax requirements. If these payments are not made by the due date, the director will be exposed to ‘statutory interest’ which is calculated at a rate of approximately 8% per annum.

There are some exceptions to this rule. Non-proprietary directors (directors who own less than 15% of the share capital), as well as unpaid directors, are excluded from the obligation to file an annual income tax return.

Do you want to find out more about extracting profit from your limited company in Ireland?

Contact us if you would like to schedule a meeting where we can discuss the various options available to you and put a financial plan in place which ensures you are drawing income and wealth from your business effectively.