What are tax efficient ways to pay directors?
There are a few options on how to pay yourself from a Limited Company. They 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 offer practical tips and discuss the main ways we advise our clients to pay themselves from their company in Ireland.
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.
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
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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.
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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.
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The sum of these credits cannot exceed €1,650.
If you are eligible to claim the earned income credit and employee tax credit, 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 payment 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
- 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
3. Dividends
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).
4. Benefit-In-Kind
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 company director, you can provide yourself benefits that you would otherwise have to buy 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. An accountant can offer you advice on your tax obligations on a case-by-case basis, as well as offer accounting and bookkeeping tips for startups.
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.