Salary versus dividends looks like a simple choice on paper. Salary is a deductible company expense, with the correct personal tax paid in real time through the payroll system. Dividends are paid from after tax profits and have a flat 25% tax withheld at the point of payment, treated as a downpayment against your personal tax return. In most cases, particularly in the early years, salary comes out ahead on tax efficiency.
But the choice between the two isn’t usually where founders go wrong. It’s what happens before a formal choice is ever made, and it’s the detail sitting underneath the basic expense rules.
Paying Yourself Before Payroll Is Registered
This is one of the most common mistakes in early stage companies. A director takes “a few quid” out of the business in the first months before PAYE registration is sorted, or receives company income directly into a personal bank account, assuming it can be squared away later.
Revenue doesn’t see it that way. Any payment to a director for work done is employment income from day one, whether or not payroll exists yet. The fix is simple in principle: sort payroll registration before the first payment leaves the business, not after.
Mixing Dividends and Salary Without Planning the Tax Year
Dividends are taxed in your personal tax return for the year they’re paid, at your marginal rate, with no PRSI relief available the way pension contributions get it. Take a large dividend in a year when your personal income is already high, and you’ll pay tax at 40% plus USC and PRSI on the whole amount in that year. Spreading the payment across tax years, or taking it as salary combined with pension contributions instead, can mean a materially smaller overall tax bill. If this is new territory, join our free webinar for a deeper look at the pay, tax, and compliance decisions founders face once the basics are sorted.
There’s a further reason to think this through early: for reliefs like SURE and R&D tax credits, paying yourself through payroll is either required or significantly more advantageous depending on your circumstances.
Treating Director’s Loans Casually
If you take money out of the company that isn’t structured as salary, dividend, or a properly documented loan, Revenue can treat it as a Benefit in Kind, or even as an undeclared dividend, with tax consequences considerably worse than if you’d simply paid yourself a salary in the first place. A director’s loan account needs to be tracked formally: what’s owed, to whom, and over what period, not left as a running balance that nobody reviews until year end.
The Detail Underneath “Wholly and Exclusively”
Most founders know the standard test for a business expense: is it wholly and exclusively for the business, is it necessary to carry on the trade, and would you have incurred it anyway if the business didn’t exist? What trips people up is the detail underneath that test.
Home office costs are more nuanced than they seem. A company can claim €3.20 per working day tax free, paid through payroll, to cover heat, electricity, and similar home office costs, with no receipts required for this specific amount. Fixed costs like broadband generally aren’t claimable, because you’d have paid for them anyway regardless of the business.
Home office rent is a trap, not an opportunity. Don’t claim rent on a home you own as a business expense. Doing so can expose you to personal income tax on notional rental income, and it complicates Capital Gains Tax if you sell the property later. The administrative saving is rarely worth the long term cost.
Benefits in Kind are often misunderstood as “free.” A company can pay for health insurance, a company car, training, or memberships, but in many cases these are treated as effectively gross salary and taxed accordingly through payroll. They can still be worth doing, provided you go in knowing the real after tax saving, rather than assuming the benefit is free simply because the company is paying for it.
The Small Gift Exemption is a genuinely tax free benefit that’s consistently underused. A company can give each employee registered on payroll, including a proprietary director, up to €1,500 a year in small gifts, completely tax free, provided the gift isn’t cash and isn’t exchangeable for cash. One4All vouchers or prepaid cards are the common route. It’s one of the very few fully tax free benefits available, and it’s surprising how few companies use it.
Getting the Sequencing Right
None of this is complicated in isolation. The mistakes happen because founders are moving fast in the early months and treat payroll registration, dividend timing, director’s loan documentation, and expense policy as things to sort out later. By the time “later” arrives, informal payments have already happened and the tax position is harder and more expensive to fix than it would have been to set up correctly from the start.
At Kinore, our team helps founders get payroll registered and director pay structured correctly from the outset, plan salary and dividend timing around the tax year, keep director’s loan accounts properly documented, and set up expense and small gift policies that hold up under scrutiny. Senior led, with dedicated client management.
Speak with our team to get your pay structure and expense claims set up correctly before your next filing deadline or join our free webinar on getting these fundamentals right from day one
