Many company directors spend a lot of time getting their limited company and other operations set up but often neglect to ask one of the most important questions … how do I get value from the company for the work that I do?
So, assuming your business is going well and there are reserves to provide a good income for yourself what is usually the most efficient way to pay yourself as a director …
How does a company director get paid?
Generally, we would plan in the following order;
1. Pay a Salary
Top of the list for a company director is paying yourself a regular salary, be that weekly or monthly.
In the early days it may seem like the right thing to not take a regular wage especially if cashflow is an issue.
However, it is really important for a number of reasons to ensure that you are paying yourself a regular salary if possible;
- It ensures that you are making PRSI contributions which are important when it comes to claiming certain benefits from social welfare, like your state pension for example.
- If you eventually look to sell your company down the line, tax reliefs like Retirement Relief and Entrepreneur Relief are only available to those who are working directors of the company. Being able to point to a regular salary payment can help to prove that you meet this test.
- We also saw during the COVID-19 pandemic that the wage subsidies available to directors and other employees could only be claimed if they were being paid regularly from the company.
2. Set up a company pension plan
Setting up a pension plan will often be the next most obvious way to extract value for a company director.
Whilst regular personal pension plans are always an attractive tax incentive, an executive pension plan can be even more attractive. That is because the limits on the combined contributions to the executive plan are significantly greater than a personal pension plan.
As well as the tax saving, another benefit is that you can potentially get access to your pension pot at the age of 50 rather than 60.
Not only can you, as an employee of the company, make contributions, the company itself can make contributions on your behalf also.
Read more about pension plans for directors here
3. Family member’s salaries
As always is the case in family owned businesses it is all hands-on deck!
Usually your spouse and/or children help out with day to day tasks of running the company and it makes sense that they should get a wage for undertaking any work for the company.
As employees of the company they will be treated the same as any other employee and would be entitled to the same benefits.
For example, they could receive up to €500 of a gift voucher each Christmas tax free under the Small Benefit Exemption Scheme.
Revenue do insist that any salary payments to family members must reflect the nature of the work they do, the time they spend working in the business and their qualifications to perform the role.
4. Travel Expenses
If you travel to meet customers or attend business meetings away from your office, and you use your own personal vehicle for these trips, then you may be able to claim money back from the company tax free to cover the cost of these trips.
Also, if you have to stay away from home on an overnight business trip you can again claim money tax free from the company to cover your accommodation and subsistence expenses. One of the criteria associated with this overnight allowance is that you must be 100km away from your home/place of work.
A word of warning on travel expenses – this is an area that Revenue have been very much focused on in the past number of years and they have been quite stringent on enforcing the rules. You would need to keep sufficient documentation to back up these expense claims and also ensure that you are satisfying all of the criteria to claim this money tax free. Otherwise the company might end up with an unexpected tax bill!
5. Take Dividends
Dividends are another method available to company directors of taking money albeit not the most attractive form of extracting value from the company.
There are a number company law requirements to be satisfied and it also should be noted that the payment of dividends will not reduce the tax bill of the company as it is not seen as a tax deductible expense.
Director’s Loan Account
If a payment is made to a company director and it does not form part of the director’s remuneration package or is not an allowable expense for the company, the payment must be set against their director’s loan account.
You can read more about Director’s Loan Accounts here
A special note:
It is crucial to remember to think of your company as totally separate to you. Although it is your company – you own it, you control it – it is actually a separate legal entity and not an extension of you as a person.
We can help
If you are a company director and you want to make sure you are extracting money for yourself efficiently, we can help you. We will sit down and work out a plan suitable for you and your business to give you peace of mind.
We offer a FREE initial consultation to all new clients. Contact us today to book yours.
Date published 11 May 2021 | Last updated 26 May 2021This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.