Paying business owners

Directors and shareholders of companies in Ireland

As a Director of a Limited Company, you can pay yourself a salary, take dividends and contribute to a pension. Or you don’t have you pay yourself at all.

Each of these have different guidelines and tax liability can vary with each option.

Keep reading to find out the main differences between each type. If you need help deciding the best option for you, you should consult with an accountant who can learn more about your personal situation.

What about Sole Traders?

All of a Sole Traders’ earnings is considered to be their income and their earnings are called ‘drawings’. Tax is paid on the total income minus expenses at the end of the year. A Sole Trader doesn’t have the option to take a salary or dividends from their business. That being said, a Sole Trader can be an employer and pay someone else a salary, check out this guide on hiring your first employee.

Switching from Sole Trader Or Limited Company

If you are considering a switch from Sole Trader to Limited Company, look at the amount of income you are earning. It may be a good time to incorporate your business if your income reaches the higher level of income tax threshold.

This means that if you are a Sole Trader earning over €70,000, you’ll need to pay over 50% tax on your profits after expenses. Income Tax, USC and PRSI will be deducted from your earnings.

Limited Companies have more scope for tax planning and therefore Directors can save on their tax liability. 

Of course, there are pros and cons to Sole Traders and Limited Companies and in this guide, we’ll show you the different ways Directors can pay themselves from their company.

An accountant can help you plan your income and give you advice on how to pay yourself in the most tax efficient way. Personal circumstances (for example, single, married or widowed) has an effect on your tax credit and tax relief eligibility.

Talk to our Client Services Team to get a quote for our accountancy services today.

Differences between salary and dividends

Salary

  • A salary refers to a fixed annual payment to a Director at regular intervals. For example, weekly or monthly payments
  • If you can't afford to pay yourself regularly, you still need to report monthly to Revenue
  • You can save on your tax liability by claiming tax credits and reliefs on your salary
  • Director salaries are subject to taxes at the source like employees (PAYE, PRSI, and USC)
  • Non-resident Directors can be paid a salary and there may be a double taxation agreement with your country of residence which means you may be entitled to a tax refund
  • Companies get a Corporation Tax deduction on Directors salaries

Dividends

  • Dividends are paid to shareholders of companies
  • It is very common in small companies for the Director and shareholder to be the same person
  • Dividends are paid from the after-tax profits of the company to its shareholders
  • There are no employers' PRSI payments on dividends
  • Companies can't pay out dividends if the company is making a loss
  • The company will need to deduct 20% Dividend Withholding Tax (DWT) on the dividend and pay this amount to Revenue
  • When Directors file their income tax return, dividends may need to be taxed at the higher tax rate (40%) depending on their income level
  • Non-resident shareholders do not pay DWT in Ireland if they complete a form V2A and need to check how dividends are taxed in your country of residence

Applying tax credits to Director's salary

There can be two types of Directors in Irish Limited Companies: proprietary Directors and non-proprietary Directors.

In general, a Director is treated as an employee of the company and their salary works the same way as an employee’s salary. They are taxed under the PAYE system and taxed at the source (i.e. the company takes the tax before it reaches your bank account).

If you would like specific information based on your personal circumstances, get in touch with our Client Services Team who can send you a quotation for our accountancy and compliance services today.

Proprietary Directors can avail of earned tax credit and employee tax credit.

This type of Director is also known as ‘controlling Director’. These individuals own more than 15% of the share capital of the company.

Proprietary Directors can avail of earned tax credit and employee tax credit (PAYE tax credit). Tax credits are to any pay you earn and can be applied through Revenue’s Online System (ROS).

Non-proprietary Directors can avail of employee tax credit.

This type of Director is also known as the ‘non-controlling Director’. These Directors own less than 15% of the share capital of the company.

Non-proprietary Directors avail of employee tax credit only.

How to use these tax credits

If you are eligible to claim the earned income credit and employee tax credit, it’s important to note that the sum of these credit cannot exceed €1,650.

You can see more common tax credits on our guide or visit the Revenue website.

There are other conditions that apply which is why it is best you speak to a professional about your personal circumstance. The earned income credit and/or employee tax credit may not be the only credits and reliefs you are eligible to claim. Speaking to a professional accountant can help you save on your tax liability.

Salary for non-resident Directors

You do not have to be resident in Ireland to be a Director of an Irish Limited Company. Non-resident Directors are also entitled to receive a salary but it's important to note they may still need to pay Irish tax on the income.

This applies regardless of your tax residence or where your Director duties are carried out. In other words, you need to pay tax to Irish Revenue on any salary you receive from an Irish Limited Company.

Double Taxation Agreement (DTA)

Non-resident Directors may be entitled to claim tax relief if you have income that you will pay Irish and foreign tax on. This is because many countries have a Double Taxation Agreement (DTA) with Ireland.

To claim a refund, you apply in your country of residence that has a DTA with Ireland. Revenue can only refund the Irish tax you pay and you cannot claim for foreign tax against your Irish income if you have been refunded the foreign tax already.

Speaking to an accountant will help you determine how you should pay your tax liability when you are not resident in the state. Talk to our Client Services Team about hiring our accountants to help with payroll.

Pay As You Earn (PAYE) Exclusion Order

Non-resident Directors could also be exempt from paying any Irish income tax if they have successfully applied for a Pay As You Earn (PAYE) Exclusion Order from Revenue. This certificate will authorise your company not deduct PAYE or USC from the Director’s salary.

The following conditions need to be met:

  1. You need to be an Irish employer
  2. The Director carries out all their duties abroad
  3. The Director is not tax resident in Ireland

What information does Revenue need?

  • The name of the Director working abroad
  • Their Personal Public Service Number (PPSN)
  • A letter stating how long they will work abroad

Contact our Client Services Team to receive a quote for our accountancy services today.

Outsource your payroll obligations

You can outsource your payroll obligations to a professional. Our Payroll Team will look after payroll set up, processing and payslips so you don’t have to worry.

Employers need to use Revenue’s Payroll Notification (RPN) to notify Revenue of how much tax each employee should pay.

If you’re unsure how to process payroll in Ireland, get a quote for our payroll services today.

Director's pension contributions

Directors who own at least 5% of a company's share capital have very attractive pension funding options.
There are two types of pension contributions you can make:

1) Employer contributions

The company can contribute to your pension on your behalf. In this case, the company is allowed to record the pension contribution as a company expense. This will help reduce the company's Corporation Tax liability.

2) Personal contributions

Directors that personally contribute to their pension can claim tax relief of either 20% or 40%, depending on their personal circumstances. Tax reliefs are usually claimed at the end of the tax tear on a Director's Tax Return. Contributing to your pension is a very attractive and efficient way to reduce your personal income tax liability.

Paying dividends to Directors

Divendends are paid with any profits that are left once tax has been paid. This is an attractive alternative for non-proprietary Directors.

Normally a company has to pay employer’s PRSI tax when giving non-proprietary Directors a salary. There is no employer’s PRSI tax if non-resident Directors take a dividend.

On the other hand, dividends cannot be deducted against a company’s tax liability whereas salaries are considered business expenses. Business expenses can reduce the amount of Corporation Tax the company pays at the end of the year.

As mentioned, your company needs to make a profit to be able to pay dividends. As a Startup, it may be difficult to pay dividends in the first few years. This being said, it’s best to speak to an accountant who understand the the specific details of your company.

Shareholder resident in Ireland

Dividend Withholding Tax (DWT)

Companies need to deduct Dividend Withholding Tax (DWT) on any dividend payments made to shareholders living in Ireland.

DWT is charged at 25% (2020) and the amount is paid to Irish Revenue.

Shareholders receive a net dividend amount (i.e dividend after-tax) and a tax credit for DWT. This credit is deducted against the shareholder's personal income tax liability.

For example

Company A pays Sarah a gross dividend of €1,000 because the company had €10,000 profit (after expenses and taxation) at the end of the year. Dividends are taxed at 25%, therefore Sarah receives €750 of the dividend.

Company A withholds €250 tax and pays this to Revenue on behalf of the shareholder. Company A must pay all the withheld tax to Revenue on the 14th day of the month following when the dividend was paid. Because Sarah received the dividend on 10/01, the company must pay the DWT amount to Revenue by 14/02.

Paying tax at the end of the year

It's important to note that the 25% DWT may not be all the tax you pay when receiving dividends.

Directors file their income tax return, (Form 11 or Form 12), with their total income for the previous year. All income (including dividends) is taxed at either 20% or 40% depending on your standard tax bracket.

This means that you could effectively pay the same amount of tax on your dividends as you would just receiving a salary.

Shareholder not resident in Ireland

In general, there is no DWT due for non-resident shareholders.

Non-resident shareholders need to file a form V2A to get an exemption from DWT. The form V2A needs to be completed by the shareholder and certified by a tax authority of the country in which the shareholder is resident.

Dividends and any other income from your Irish company will be taxed in the country you are resident. Therefore it is also important to speak to an accountant in your resident country.

Filing Directors tax return

Proprietary Directors are legally obliged to file a Directors Tax Return each year. As mentioned, when a Director takes a salary, it is taxed at the source through payroll, similar to an employee. However, they are still required to file a Directors Tax Return even though they may have already paid some of their tax.

If the Director has no income, through salary, dividends or otherwise, they are still required to file a tax return. This is sometimes called a Nil Return.

In general, non-proprietary Directors are exempt from filing an Income Tax Return. Check your obligations with an accountant who has cross-border expertise.

The importance of having an accountant

Paying yourself from your Limited Company can be a difficult task – especially if you don’t know the rules, what taxes are applicable and the processes involved.

Having an accountant ensures you are taking money out of your company in the most tax-efficient way.

Talk to our Client Services Team on +353 01 905 9364 or email us on hello@accountantonline.ie.

You may also be interested in