Key Post Should I leave profits in the company and pay Corporation Tax?

Brendan Burgess

Brendan Burgess

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The big mistake a lot of company owners make is the very simple statement "Corporation Tax is 12.5% while total taxes on income are 50%, so I will leave the profits in the company and pay less tax."

The problem with this is that they will have to pay tax on the profits when they extract them from the company.

In simple terms
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So the owner of the company will have the illusion of paying less tax and having more money, but that more money will be sitting in the company and whenever they access it they will have to pay tax on it.

If you choose to leave profits in your company, you should have a written plan from your tax advisors explaining why you are doing so and how and when you are going to extract that cash tax-efficiently.

While every case is different, there some common principles which owners of companies need to understand so that they better understand their accountant's tax advice.
 
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Summary of thread
1) The default plan should be to take the profits from the company - so we will look at how to do that and what deadlines you must meet
2) Some other reasons for not leaving cash in the company
3) Some operational reasons why you might leave profits and cash in the company
4) You can get a refund of Corporation Tax if you make a loss the following year
5) Some tax planning reasons why you might leave profits in the company
6) Some related issues
 
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In most cases, the right strategy is to take the profits out of the company and pay Income Taxes on them.

Illustrative simplified case

Year end 31 December 2022

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So the director can live comfortably on the €150k salary he has taken out of the company. The question is what to do with the €100k profit?

The most tax-efficient way of dealing with this is to contribute to a pension scheme. That eliminates the profit and he pays no income tax either.

Deadlines
If he is making a pension contribution, he must make it before the year-end, i.e. the 31 December 2022. He can't accrue a pension contribution and pay it in 2023.

Most people won't know what their profits are at the year-end, and will have to wait until the accountant prepares the accounts. In the above case, if there is a draft profit, the company can accrue director's salary of €100,000 and eliminate the profit for Corporation Tax purposes.

However, the accrued salary should/must be paid within 6 months of the year-end i.e. by 30th June. Otherwise the salary will be deemed to have been paid in December 2022 and interest will be charged on the underpaid PAYE and PRSI.

So make sure your accountant prepares the accounts within a few months of the year-end so that you have time to plan the best way of dealing with profits.
 
Some other reasons for not leaving cash in a company

If you build up a lot of cash in a company how does the company invest it?
If you buy shares with it, the company will pay CGT when the company sells the shares and you may then pay CGT when you wind up the company, so you pay CGT twice.

Investment income such as interest or dividends is subject to a higher rate of Corporation Tax than ordinary trading income.
 
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Some operational reasons you might leave cash in the company.

The general principle is that you should not leave large amounts of profits and cash in the company. But if you are a growing company with a need for capital expenditure or working capital, then it is perfectly ok to leave profits in the company. It is much better to fund the company from after-tax profits than to rely on bank borrowing. (This does not apply to leaving cash in the company to buy the company's premises - I will deal with this later.)

A company with a strong balance sheet which pays its creditors promptly will find it much easier to get credit from suppliers and some suppliers may even offer a discount for early payment.

In uncertain times, you might want to leave cash in the company to tide you over a bad year.
Say you make €100k profit in 2022. But, while the business is fundamentally, sound, 2023 might well be a bad year and you might make no profit before salary and tax. Leave the profit in the company and draw it down as salary in 2023.
 
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A company can set the loss in any year against the taxable profits in the previous year and get a refund. For example:

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The losses can only be set back one year.

So in this case when the Director is reviewing the tax plan for 2022 in June 2023 and deciding what to do with the profits, they will decide to leave it in the company.

It's terribly important to make sure that the Director uses up his full 20% tax credit every year. So you don't want a situation where you pay out all the profits in 2022 and pay 50% taxes only to find that you get no salary in 2023 and waste your tax credits and lower rate tax bands.
 
Some tax planning reasons why you might leave taxable profits in a company

You may qualify for Retirement Relief or Entrepreneur Relief when you exit the company so if you have a plan to retire within the next 5 years or so, then it might be worth leaving profits in the company.

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If you wind up the company and don't qualify for any reliefs, then you will pay 33% CGT on the proceeds of the company.

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So you get €58,500 into your hand compared to about €50,000 if you pay it via salary, so it's worth doing if you are winding up the company.

And the tax benefit is much higher again, if you qualify for Retirement Relief or Entrepreneur Relief.

In my opinion, you should only leave taxable profits in the company if you have a fairly concrete plan to
to retire or to sell the company within the next 5 years. Beyond 5 years, it is more likely that these tax reliefs could be changed or scrapped completely.

But it's absolutely essential that you do not pay Corporation Tax by default. You should only pay it as part of a written plan which shows how you will later extract the cash.
 
Some related issues

Can I leave the profits in the company and give myself a loan instead of paying salary?
No, that doesn't work. If a company gives a director or shareholder a loan, it must be reported to the Office of Director of Corporate Enforcement(?).

Can I leave the profits in the company and buy the premises the company works from?
You can but it's a very bad idea. When the company sells the premises, the company will have to pay CGT and then when you sell or wind up the company you will pay CGT again.
 
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