What are tax efficient ways to pay directors?
As a director, there are a few options on how to pay yourself from a Limited Company. The options you chose will depend on your circumstances and it is important to ensure you are always fully tax compliant whilst being as tax efficient as possible.
In this guide, we discuss the main ways we advise our clients to pay themselves from their company in Ireland.
If you need help deciding the best option for you, consult with an accountant who can learn more about your personal situation.
1. Limited Company director salary
Paying yourself a salary will ensure a regular, fixed income each month. This payment will be subject to PAYE, PRSI and USC but will also have the option of tax credits and additional reliefs. Additional reliefs available include pension contributions, flat rate expenses, and home-office expenses.
Paying yourself through the PAYE system also eliminates the accumulation of tax liability at the end of the year as your taxes will be paid monthly through the normal payroll system. This means that your company needs to operate a payroll system or outsource payroll services in order to pay you a salary.
It is also important to note that the gross salary for the director will be an allowable tax deduction for the company and will help reduce any Corporation Tax due.
Tax credits on directors' salary
Proprietary directors can avail of earned tax credit and employee tax credit
This type of director is also known as the ‘controlling director’. These individuals own more than 15% of the share capital of the company.
Non-proprietary directors can avail of the employee tax credit only
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.
The sum of these credits cannot exceed €1,650.
If you are eligible to claim the earned income credit and employee tax credit, it’s important to note that the sum of these credits cannot exceed €1,650. There are other conditions that apply which is why it is best you speak to a professional about your personal circumstance.
Salary for non-resident directors
Non-resident directors are also entitled to receive a salary but it’s important to note they may need to pay Irish tax on their income. This applies regardless of your tax residence or where your director duties are carried out.
We also recommend checking whether your country of residence has a Double Taxation Agreement (DTA) with Ireland. A double taxation agreement ensures that you only pay taxes to one country and you may be eligible to claim tax relief on any income that is subject to Irish and foreign tax.
Speaking to an accountant will help you to determine how you should pay your tax liability when you are not a resident of the state.
What is a Pay As You Earn (PAYE) Exclusion Order?
A PAYE exclusion order is a certificate issued by Irish Revenue to authorise your company not to deduct PAYE or USC from the director’s salary, and the employee can pay payroll taxes in the country they are living in. It is usually given when an Irish resident director on Irish payroll leaves Ireland to live and work from abroad.
. The following conditions need to be met:
- You need to be an Irish employer
- The director carries out all their duties abroad
- The director is not a 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
2. Pension contributions
Companies may offer a pension scheme whereby they contribute to a pension on the directors’ behalf.
As a director of the company, you can choose to pay into the pension and claim tax relief at the standard rate (20% or 40% depending on personal circumstances). Contributing to a pension scheme through your business is a tax-efficient way to reduce the amount of tax you pay on your earnings.
The pension amounts paid by the company are also tax-deductible expenses for the company and will help reduce any Corporation Tax liability.
- Employer contributions: the company can contribute to your pension on your behalf, claim it as an expense, and thereby reduce the company’s Corporation Tax liability
- Personal contributions: directors can personally contribute to their pension and can claim tax relief of either 20% or 40%, depending on their personal circumstances
A director can only receive dividends if they hold shares in the company.
The amount of dividend that can be paid will depend on the after-tax profits of the company and are therefore not a tax-deductible expense for the company.
Dividends will also be subject to a 25% dividend tax and will also be subject to income tax (depending on whether you are in the 20% / 40% bracket).
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.
5. Share buybacks
Directors of a Limited Company are often also shareholders, who own part or all of 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.
Frequently Asked Questions
Directors’ Fees vs Salary Ireland
Directors’ fees are fees which are attributable to specific director duties, like attending board meetings, and not remuneration under a contract of employment. The fees paid to directors are chargeable to tax under the normal PAYE system rules.
Directors can be compensated by either salary and/or directors’ fees. Normally a director will be an employee of the company and therefore will operate through the PAYE system with a salary/remuneration package.
What is directors remuneration?
Directors’ remuneration is the full compensation package received by a director for their service and is made up of many different elements compared to regular employees.
A director’s basic salary can be topped up with benefits such as health insurance or pension plans, bonus structures based on company performance, share options etc.
The level of remuneration that a director receives will be determined by the company. Companies often let the shareholders vote on any proposed remuneration package for an incoming director. Alternatively, some directors set the level of remuneration themselves, using legal restrictions to ensure they are acting in the best interest of the company. In the event of a struggling company, excessively high-paid directors could be in violation of these restrictions.
Distinctions that play an important role in determining the remuneration package for a director include the scope of the directors’ duties, the directors’ performance, and whether they are a shareholder in the company.
Tom is a Fellow Chartered Certified Accountant (FCCA) and Chartered Tax Advisor (CTA) and is Accounting Team Manager at Accountant Online. Areas of expertise include Accounting, Compliance, Taxation relating to small business and company directors.