Depending on your personal circumstances you may need a regular income from your company or perhaps or a lump sum in the future. Tax efficient extraction of cash from a company requires careful planning to ensure minimal tax leakage. We have outlined in brief below the most common methods of extracting cash from a company and the implications. If you want a further detailed analysis of any of the options below get in touch with our team today! 

Salary

Any salary payable to you as a director or benefits in kind taken must have the appropriate PAYE/PRSI deducted at the marginal rate of tax. However, a salary payable to a company owner is normally a tax deductible expense for a company. If there is sufficient surplus cash, would generally recommend that a salary is taken annually to maximize the 20% income tax rate band (currently €35,300) .

Dividends

Dividend payments are not tax-deductible payments for the company. The company will be required to withhold dividend withholding tax at 25% from any dividends paid to you as a shareholder. The dividend would be taxed at your marginal rate of income tax in addition to USC and PRSI where applicable when filing the your income tax return. A tax credit would be available to you for the DWT deducted. The lower level of withholding tax gives you a cash flow advantage (with the income tax return for 2021 not due to be filed and paid until October/ November of 2022) but not an overall reduction in tax payable.

The main advantages of paying a dividend is that it may reduce the close company surcharge, if any, payable by the company in respect of passive income earned, in addition to the cash flow advantage of the 25% withholding tax rate.

Pension Contributions

A director’s pension can be set up for your benefit, allowing the company to transfer profits away from the business tax efficiently and ring fence them for your future. Contributions paid by the company will be fully tax deductible for corporation tax purposes provided they do not exceed Revenue limits, which are generous, and the contributions are paid during the accounting period in which the deduction is made.

Gains arising in Revenue-approved schemes made by the pension fund are exempt from income tax and capital gains tax. In addition, there will be no BIK payable by you on the pension contributions.

Termination Payments

A certain level of tax free ex gratia payment is often available to a director/employee leaving an office or employment with a company subject to certain conditions and limitations. This could be very tax efficient method of extracting cash from your company in advance of a sale or wind up of the company, or indeed if you are stepping down from your position as director. The relief is based on the years of service as a director/employee and the level of remuneration paid during that time.

The Liquidation of the Company

If a company has cash reserves and is considering winding up it will normally be more tax efficient to liquidate the company and extract the cash at the capital gains tax rate of 33%/10% than to take the money as income (e.g. dividend or salary taxed at the marginal rates). It is important to consider the use of termination payments and/or pension contributions to fully maximise the tax savings available in advance of liquidation, as outlined above.

The liquidation could be combined with capital gains tax retirement relief/ entrepreneur relief to reduce or possibly eliminate the tax liability on liquidation. There are anti-avoidance provisions relating the liquidation of companies that need to be considered (specifically where an individual is seeking to avoid income tax by liquidating the company) which we can advise on further if necessary.