As a company owner/director, you have the potential to decide how to pay yourself – salary or dividends. This gives you the flexibility to plan your income, ensure that you are paying yourself in the most tax-efficient way, and it is one of the many advantages of setting up a Limited Company in Ireland.
This guide will take you through the factors you should consider when deciding how much to yourself and some tax-efficient options for extracting money from your business.
For specific advice on your personal circumstances, contact a member of our Client Services team – we are always happy to help.
Factors to consider when deciding how much to pay yourself
Once you have considered the options on how to pay yourself, the next question to ask is “how much should I pay myself?” At the start of your business journey, your company might not make a profit and you may wonder how much you should take out of the business to pay yourself. As your business grows, you may consider more detailed tax planning to ensure you continue to minimise your tax bill.
1) What is your cash flow situation?
Look at your current cash flow situation and determine whether there is enough money after your bills are paid to pay yourself. When doing this, it’s also a good idea to set aside some money as a cushion for a rainy day, in case of sudden unexpected expenses. Good cash flow management can help to ensure that there is enough money to cover all your bills as they come due.
2) What are your business goals?
Think about the goals of the business – do you want to sell your business for a profit down the line or are you running the business to create a source of income for yourself?
By understanding what you want from the business, you can start to focus and run your business in a way that helps you to meet your goals.
For example, if you are thinking of selling your business, you may need to consider how to create value in your business to make it attractive to competitors or management. This may mean reinvesting any leftover cash to help it grow, rather than taking a salary straight away.
3) What are your personal needs?
Think about how much money you need to pay your personal expenses, such as household rent or mortgage, bills, and expenses. Setting up a company is a big commitment and it’s understandable if taking money from the business is non-negotiable. It’s important that you value the time you invest in your business.
However, it is good to note that many business owners pay themselves modestly, especially in the early days. One way to ensure that you pay yourself in the most tax-efficient way is to ensure that you are availing of all the tax credits, reliefs, and schemes available to reduce your tax bill.
Tax implications of paying yourself from your business
When you take an income from your company, you will be obligated to pay tax on it. The rate of tax you pay will depend on how much you pay yourself.
One of the benefits of setting up a Limited Company is that you can plan your salary so you can stay in a lower tax bracket and pay less tax. For this reason, many Sole Traders decide to change to a Limited Company once they start earning a high amount.
If you have any questions about the most tax-efficient way you can pay yourself – talk to us today and we are happy to help.
Consider setting up a separate business bank account
When you set up your own business you should consider setting up a separate bank account to keep your business and personal finances separate. Money in the business bank account should only be used for the purposes of the business and shouldn’t be used for personal expenses. Keeping these accounts separate can help make analysing your business’ cash flow easier.
Check out our guide to the best business bank accounts in Ireland for help deciding on a provider to suit your needs.
Alternative ways to pay yourself from your business
As a new business owner, you may not have the funds to pay yourself at the industry level or market rate, and you may decide to pay yourself less to stay in a lower tax bracket. However, there are other ways you can pay yourself from your business too.
Here is a list of tax-efficient ways you can get the most value out of your business no matter how much you decide to pay yourself.
A Benefit-In-Kind (BIK), or perk, is a non-cash benefit provided to employees or directors. Although a Benefit-In-Kind isn’t actual cash, as a director of a company you can provide yourself benefits that you would otherwise have to buy for yourself from your salary.
A popular example of a Benefit-In-Kind for directors is an electric car. There are special tax conditions for electric cars to encourage people to use them, so you won’t pay any tax on this kind of benefit.
Note that you may have to pay tax on other Benefits-In-Kind so we recommend that you seek advice about your specific situation. An accountant can advise you on your tax obligations on a case-by-case basis.
2) Contribute to a pension
Contributing to a pension scheme through your business is a tax-efficient way to reduce the amount of tax you pay on your earnings. You can set up a pension plan for your company’s employees and directors, where both employees and employers make contributions. As a director, you can contribute to your pension personally and through the company.
Not only are there tax reliefs for pensions contributors, but any pension contributions made by an employer for its employees are also considered a business expense, which can lower the company’s overall Corporation Tax bill.
3) Share buybacks
Directors of a Limited Company are often also shareholders, who own part or all the business. You can decide to sell these shares back to your business, as a way of extracting money from it. This is known as a share buyback.
Shares can only be bought back if the company is in profit and the directors must make a special resolution, which says that they agree to shares being bought back.
However, if you are a single director company you might decide to sell some of your shares back to take money from the business instead of paying yourself more and risking being in a higher tax bracket.
There are often tax implications involved with share buybacks and we advise talking to an accountant for specific information on your situation. Talk to our Client Services team about outsourcing your tax responsibilities to us.
Part of owning your own business is deciding how to compensate and reward yourself for the time and work you put into running it. We can help you decide how much you should pay yourself as well as other options for extracting value from your business.
For help deciding what’s best for your personal situation talk to a member of our Client Services team today.
Larissa is a Fellow Chartered Accountant (FCA) and is the Founder and CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland, Northern Ireland and the UK.
Larissa has been shortlisted for the Image ‘Businesswoman of the Year Award’ in 2017 and 2018 and awarded ‘Accountant of the Year’ in 2018. Larissa volunteers as a role model for LEO Donegal’s ‘Ambition’ programme and is a Lead Entrepreneur for ‘ACORNS’ and ‘Going For Growth’ which are development programmes designed to support ambitious female entrepreneurs, and for ‘Back For Business’, a development programme assisting returned emigrants or those planning to return to Ireland to start and develop a business. Accountant Online has won many awards, including ‘Best Small Practice’ in 2017, ‘Best Medium Practice’ in 2018, and in 2020, ‘Medium Practice of the Year’ and ‘Practice of the Year’.