Taking on a director’s role is an exciting but challenging time, and starting your company off on the right foot can have financial benefits even years down the line. One area to think about is how you are going to pay yourself in a way that suits both you and your business.
If you are the director of a limited company in Ireland, there are a few options available. While the best course of action will depend on your circumstances, it’s important to make sure that you are not only tax compliant but that you save as much on your tax bill as possible. Here is everything you need to know about paying yourself from a limited company in Ireland.
Proprietary Director vs Non-Proprietary Director
First, it’s important to establish your position as a director, as this will have an impact on your tax obligations. Fortunately, there are only two main types of director and a clear differentiation between the two. In a nutshell, a proprietary director (or controlling director) owns more than 15% of the share capital of the company. A non-proprietary director (or non-controlling director)owns less than 15% of the share capital of the company.
Just like how you would be paid as an employee, you have the option to receive a fixed annual payment on a regular basis, for example every 2 weeks or every month. Paying yourself a salary is easily the most straightforward option, however it does have some other tax implications which we’ll take a look at below. Here are the key points to consider:
- While your income may be taxable, you also have the option to save on your tax by claiming tax credits and tax relief (for more information about available options, read 10 Ways to Cut Your Tax Bill)
- The director’s salary, like other employee’s salaries, can be deducted from Corporation Tax
- As you are receiving a salary in the same way as an employee, the income you receive will be subject to the same taxing at source, including PAYE, PRSI and USC.
- You may not always be able to afford your salary payment, but even if you can’t you will still need to report to Revenue every month
- If you are a proprietary director you will have to file an income tax return each year regardless of the fact your salary has been taxed at source and may have to make payments to meet preliminary tax requirements. If you are a non-proprietary director you are usually excluded from this obligation
- Proprietary directors are also not entitled to Employee Tax Credit, unlike other employees and non-proprietary directors. The same applies in most cases for a spouse or family member of a proprietary director who is paid a salary from the company (however there are exceptions to the rule)
- However, proprietary directors (and their spouse and family members) may be entitled to Earned Income Credit. For the full criteria, head over to the Revenue website.
- Income from a salary can be included for pension funding calculations whereas a dividend cannot. This is an important thing to consider, as directors who own at least 5% of share capital are afforded very attractive pension funding options
- If your living costs are at a manageable level, you may wish to simply take out the lowest salary you can afford and pay the least amount of income tax as a result. Your company may pay you additional employer pension contributions, or you may use the remaining funds to pay down debt in your business or to fund future expansion.
Director’s Pension Contributions
If your company contributes to a pension on your behalf then it can be recorded as a company expense. This means that it can help to reduce the company’s Corporation Tax liability. If you personally contribute to your pension then you can use pensions to pay less tax and claim tax relief on your Director’s Tax Return of either 20% or 40% (depending on your personal circumstances). For more information, take a look at our guide about pensions for small business owners.
Salary Payments for Non-Resident Directors
Even if you do not live in Ireland if you are taking a salary from an Irish limited company you may still need to pay income tax to Revenue. However, if your country of residence has a Double Taxation Agreement (DTA) with Ireland and you have income taxed in both countries, you may be able to claim relief on the tax you paid in Ireland. For example, If you are a UK company employing staff in the Republic of Ireland, there are steps you need to take to be payroll compliant.
You may also be able to apply for a PAYE Exclusion Order from Revenue if you are a non-resident director. This will allow your company to not deduct PAYE or USC from your salary. To qualify for the exclusion, you must not be a tax resident in Ireland and must carry out all your duties in a different country. To check your eligibility and find out how to apply, you can take a look at the Revenue website.
Dividends are what you can extract from your company once all tax has been deducted. They are paid on a regular basis (usually once a year) to the shareholders of the company. A director can only receive dividends if they are also a shareholder, but in smaller companies it is very common for the director and shareholder to be the same person. When deciding whether to take dividends over a salary, here are the main things to bear in mind.
- Dividends can only be taken where there is available profit at your company, and there is a statutory requirement to calculate what profits are available for distribution before paying them.
- Dividends can also not be deducted against your company’s tax liability (though salaries are considered a business expense, dividends are not)
- Unlike a salary, dividends are not subject to PRSI payments
- However, dividends payments are subject to Dividend Withholding Tax (DWT) at 25% which must be filed and paid to Revenue every month that the company makes a relevant distribution
- You may also have to pay additional tax on top of the DWT, as dividends are taxed as all other income at a rate of 20% or 40% (depending on your tax bracket)
Dividend Payments for Non-Resident Directors
There are a few key differences if you are not a resident in Ireland but are a director of an Irish business. Just like any other income you receive, your dividend payments will be taxed in your country of residence, so you will need to find out how that is done. Usually, you will not be charged DWT in Ireland, although you do need to file a V2A form to get an exemption and have it certified by the tax authority where you live.
Approaching Retirement Or Exiting Your Business
When the time comes to move on from your business, you have a couple of options available to you for cash extraction. The first is capital gains tax retirement relief in the form of Retirement Relief or Entrepreneur Relief, depending on your circumstances. Capital Gains Tax (CGT) is levied at 33% in Ireland, and so if no relief is claimed you could be paying over nearly €1 for every €3 earned on the sale of your shares in your company.
However, Retirement Relief can provide an exemption from CGT for many business owners (up to €750,000 proceeds are exempt on business sales to parties outside of the family, whereas no threshold applies on the sale of your business to a son or daughter). Entrepreneur Relief does not exempt you from CGT, but it can reduce the rate from 33% down to 10% – this is a significant tax saving. Naturally, both forms of relief come with their own criteria, and you can find more information about their requirements.
Your second option for cash extraction from a company is a termination payment – an additional amount that can be received tax-free from your company when it comes time to retire. The basic exemption allows you to receive a payment of €10,160 plus €765 for each complete year of service. As an example, if you have built up and worked in your company over a 25 year period, you could take a tax-free termination payment lump sum of nearly €30,000. Combine this with a tax-free pension lump sum, and potentially a tax-free or tax-relieved gain on the sale of your business, and you have saved yourself a significant amount of money.
Generally speaking, a director’s salary, although taxed under PAYE, usually gives a lower tax liability than a dividend. Bear in mind that it is also possible to pay yourself a minimal salary and make up the rest through dividend payments. However, what works best for one person may not be the right choice for you.
Both dividends and salaries have their pros and their cons. To help you make the right decision, it’s always a good idea to find an accountant who can advise you on the best option for your specific circumstances. At SCK Group, we have years of experience providing financial services to businesses in Ireland, from the launch stage to scaling revenue and everything in between.
If you would like extra peace of mind that you’re making the right choice for your director’s payments, then we would love to help. To arrange a consultation, give us a call on (01) 291 0800 or fill out the form on our contact page.