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Guide to paying yourself as a business owner
By: Damien
31 Aug, 2022
Many people look to set up and run their own business in Ireland with the aim of becoming wealthy – but how do you pay yourself? Our article guides you through.
As a business owner in Ireland a question that must be addressed early on is how you receive payment. The three most common methods are through a salary, dividends or contributions to a pension. Of course, you can elect not to receive any payments, for instance if you are building the business up and want to plough any profits back into it.
All the main options come with advantages and drawbacks – as well as differing corporate rules and tax burden.
If you are deciding on which payment type to take, it pays to get advice from an accountant that is expert in financial matters such as this. The team at Malone & Co are experienced advisers on tax issues – call us today for more information.
This is an important question and depends on the growth stage of the business. At the start-up stage it may not be making a profit, or you may want to put profits back into the company to grow it.
If you want to take an income for the business, consider its cash flow to see how much – if any – you can take for yourself. It is also worthwhile keeping some funds aside as a cushion in case of any unexpected expenses or loss of income.
Another consideration is how much tax will have to be paid – and that can influence what form the business takes.
Many entrepreneurs start off on their own as sole traders and in their case all earnings count as income, and any money taken out for personal reasons is known as ‘drawings’.
Sole traders cannot take a salary or dividends, but they can employ another person and give them a salary. Sole traders’ tax is worked out by deducting expenses from their complete income during a 12-month period.
If the business has grown to such an extent that you are earning more than €70,000 per annum, it could be time to consider making it a limited company. Sole traders must pay more than 50% tax on earnings after expenses when they exceed €70,000. But in limited companies there is more scope for tax planning, which can bring down an owner/director’s tax liability.
In limited companies, the rules for directors and shareholders are different to those for sole traders. This includes being able to claim a salary, dividends and pension payments and there are advantages to all of these, but which is right depends on the business and personal circumstances.
A salary is a set amount paid regularly and is subject to being taxed through mechanisms such as PAYE. Directors can claim tax credits and relief on their salary.
However, it should be noted that if you aren’t taking a regular salary, it still needs to be reported monthly to the Revenue.
In addition, a business’ Corporation Tax is reduced to account for directors’ salaries.
Meanwhile, dividends are paid to shareholder(s) from its net profits. But a dividend cannot be paid if the business is loss making. There is also the option of not paying a dividend and ploughing profits back into the business.
If a dividend is awarded to shareholders resident in Ireland, the business must deduct Dividend Withholding Tax – charged at 25% – on whatever is paid, which goes to the Revenue.
Shareholders are given a tax credit for dividend withholding tax, which is taken from their personal income tax amount.
This isn’t the only tax dividend receiving shareholders could be liable to pay. When filing an income tax return, directors’ income is subject to tax of 20% or 40%, depending on how much they have made in that 12-month period. This ensures the shareholder pays the same amount of tax on their dividend as they would if they received a salary.
Dividend Withholding Tax rules are different for shareholders that do not live in Ireland. They are exempt from Dividend Withholding Tax, but they must submit a V2A form to claim this, and it must be verified by the tax authority of the country they live in.
Generally, directors who receive a salary are treated the same as employees in that they are taxed through PAYE.
But the rules are different in Irish limited companies with proprietary and/or non-proprietary directors.
Proprietary directors – sometimes known as controlling directors – own in excess of 15% of the company’s shares, and they can benefit from an earned tax credit and employee tax credit. These are applied on payments, through the Revenue Online System.
Meanwhile, non-proprietary directors – those who own up to 15% of the business – can take advantage of the employee tax credit.
To qualify for the earned tax credit and employee tax credit the director has to fulfil various eligibility criteria, and it should be noted that they cannot exceed €1,650 in total. Therefore, it is advisable to seek advice an accountant to assess your eligibility for these and, if so, how to apply for them.
Directors with a stake in a business of more than 5% can benefit from pension contributions, with two available – employer or personal contributions.
Employer contributions sees the business put into the director’s pension on their behalf, which turns it into an expense and helps to bring down the total corporation tax the business has to pay. Elsewhere, personal contributions are as they sound – directors put money into their pension and are able to claim 20% or 40% tax relief on them. How much this amounts to depends on how much their total income is.
All tax relief can be claimed on a Director’s Tax Return, which is filed annually when the tax year ends.
A Director’s Tax Return must be filed annually by proprietary directors, even if they take a salary and tax is taken through PAYE. Likewise, even if a director doesn’t take any cash out of the business in a year through a salary or dividend, a return must still be submitted.
As this article shows, paying yourself when you run a business, and ensuring your arrangements are as tax efficient as possible, can be complicated. This is why it is always best to seek advice from accountants such as Malone & Co. Our team of experienced tax and accounting professionals offer expert advice based on a simple approach that is focused on the customer and constantly looks to add value to their business and improve their financial standing.
Malone & Co. provides a range of accounting, auditing, bookkeeping, VAT, payroll, company secretarial services, and corporate services. This includes tax evaluation and planning for business, personal and family, tax residence planning for internationally mobile clients, tax efficient remuneration of owners and key staff, and revenue audits and investigations. The firm has offices in Rathcoole West Dublin and Naas in Co. Kildare.
As a business owner in Ireland a question that must be addressed early on is how you receive payment. The three most common methods are through a salary, dividends or contributions to a pension. Of course, you can elect not to receive any payments, for instance if you are building the business up and want to plough any profits back into it.
All the main options come with advantages and drawbacks – as well as differing corporate rules and tax burden.
If you are deciding on which payment type to take, it pays to get advice from an accountant that is expert in financial matters such as this. The team at Malone & Co are experienced advisers on tax issues – call us today for more information.
How much to pay yourself?
This is an important question and depends on the growth stage of the business. At the start-up stage it may not be making a profit, or you may want to put profits back into the company to grow it.
If you want to take an income for the business, consider its cash flow to see how much – if any – you can take for yourself. It is also worthwhile keeping some funds aside as a cushion in case of any unexpected expenses or loss of income.
Another consideration is how much tax will have to be paid – and that can influence what form the business takes.
Sole trader
Many entrepreneurs start off on their own as sole traders and in their case all earnings count as income, and any money taken out for personal reasons is known as ‘drawings’.
Sole traders cannot take a salary or dividends, but they can employ another person and give them a salary. Sole traders’ tax is worked out by deducting expenses from their complete income during a 12-month period.
If the business has grown to such an extent that you are earning more than €70,000 per annum, it could be time to consider making it a limited company. Sole traders must pay more than 50% tax on earnings after expenses when they exceed €70,000. But in limited companies there is more scope for tax planning, which can bring down an owner/director’s tax liability.
Limited companies
In limited companies, the rules for directors and shareholders are different to those for sole traders. This includes being able to claim a salary, dividends and pension payments and there are advantages to all of these, but which is right depends on the business and personal circumstances.
A salary is a set amount paid regularly and is subject to being taxed through mechanisms such as PAYE. Directors can claim tax credits and relief on their salary.
However, it should be noted that if you aren’t taking a regular salary, it still needs to be reported monthly to the Revenue.
In addition, a business’ Corporation Tax is reduced to account for directors’ salaries.
Paying a dividend
Meanwhile, dividends are paid to shareholder(s) from its net profits. But a dividend cannot be paid if the business is loss making. There is also the option of not paying a dividend and ploughing profits back into the business.
If a dividend is awarded to shareholders resident in Ireland, the business must deduct Dividend Withholding Tax – charged at 25% – on whatever is paid, which goes to the Revenue.
Shareholders are given a tax credit for dividend withholding tax, which is taken from their personal income tax amount.
This isn’t the only tax dividend receiving shareholders could be liable to pay. When filing an income tax return, directors’ income is subject to tax of 20% or 40%, depending on how much they have made in that 12-month period. This ensures the shareholder pays the same amount of tax on their dividend as they would if they received a salary.
Dividend Withholding Tax rules are different for shareholders that do not live in Ireland. They are exempt from Dividend Withholding Tax, but they must submit a V2A form to claim this, and it must be verified by the tax authority of the country they live in.
Tax credits for directors
Generally, directors who receive a salary are treated the same as employees in that they are taxed through PAYE.
But the rules are different in Irish limited companies with proprietary and/or non-proprietary directors.
Proprietary directors – sometimes known as controlling directors – own in excess of 15% of the company’s shares, and they can benefit from an earned tax credit and employee tax credit. These are applied on payments, through the Revenue Online System.
Meanwhile, non-proprietary directors – those who own up to 15% of the business – can take advantage of the employee tax credit.
To qualify for the earned tax credit and employee tax credit the director has to fulfil various eligibility criteria, and it should be noted that they cannot exceed €1,650 in total. Therefore, it is advisable to seek advice an accountant to assess your eligibility for these and, if so, how to apply for them.
Pension contributions for directors
Directors with a stake in a business of more than 5% can benefit from pension contributions, with two available – employer or personal contributions.
Employer contributions sees the business put into the director’s pension on their behalf, which turns it into an expense and helps to bring down the total corporation tax the business has to pay. Elsewhere, personal contributions are as they sound – directors put money into their pension and are able to claim 20% or 40% tax relief on them. How much this amounts to depends on how much their total income is.
All tax relief can be claimed on a Director’s Tax Return, which is filed annually when the tax year ends.
A Director’s Tax Return must be filed annually by proprietary directors, even if they take a salary and tax is taken through PAYE. Likewise, even if a director doesn’t take any cash out of the business in a year through a salary or dividend, a return must still be submitted.
Get advice
As this article shows, paying yourself when you run a business, and ensuring your arrangements are as tax efficient as possible, can be complicated. This is why it is always best to seek advice from accountants such as Malone & Co. Our team of experienced tax and accounting professionals offer expert advice based on a simple approach that is focused on the customer and constantly looks to add value to their business and improve their financial standing.
Malone & Co. provides a range of accounting, auditing, bookkeeping, VAT, payroll, company secretarial services, and corporate services. This includes tax evaluation and planning for business, personal and family, tax residence planning for internationally mobile clients, tax efficient remuneration of owners and key staff, and revenue audits and investigations. The firm has offices in Rathcoole West Dublin and Naas in Co. Kildare.
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