Private Company and Tax on Company Dividends

MikeM

Frequent Poster
Hi There,

I'm looking for advice.

I own my own small company and was wondering if I'm been tax efficient with my income from the company. Both my wife and I take a salary of 100k between us paying tax at the higher rate. We do not declare a dividend from the company currently.

I'm wondering if my thinking is correct so I'm open to any input out there. Here are my thoughts

If both myself and my wife decided to take a salary each that would bring us under the higher tax rate, say broadly speaking 25k each and then at the end of the year declare a dividend of 50k from the company would we end been more tax-efficient doing this? My understanding is that if we are both on the lower tax rate we would only pay 7.5% tax on the company dividends. Is this correct?

Kind Regards,
MikeM
 

audioflaps

Registered User
I'm in the same boat. My accountant has advised me that the whole "company dividend" option is no longer worthwhile as its taxed exactly like your normal earnings. No different tax rate - its just you taking money from your company as a "dividend" rather than "salary". Interested to hear what other people here reply with though
 

RedOnion

Frequent Poster
Your accountant is correct @audioflaps

There is a different treatment in the UK which causes confusion.

Depending on personal circumstances, generally the areas to look at are pension contribution, and possibly an exit strategy to take advantage of lower capital gains tax rates if they apply.

Ask your accountant for advice specific to your circumstances.
 

audioflaps

Registered User
I take a relatively small wage from my company, and this year there was a decent sized lump sum of profit sitting in the company account. Rather than taking it out and being hit with around 50% tax, I put in a large sum into my company pension. Depending on your age, you can put in quite a large amount of money as a once off sum as Revenue will allow you to use credit from previous years of non-contribution. This only applies to a company pension scheme however - its your company putting money into the directors pension. Ask your accountant about that. 100k into your pension tax free is better than being left with 50k after taking it out from the company.
 

MikeM

Frequent Poster
Done some more digging and I think my assumptions are incorrect. If I did as I suggested pay myself and my wife a minimum income and take the rest of the cash as company dividends - there is a ceiling on what dividend tax you can pay the 7.5% and the remainder of the dividend would be taxed on 32.5%. Net savings in my case would be negligible. Taxman wins again.

Since I own my own company I really don't like pensions. My view is that you pay into a pension all your life and then you retire. I believe a person can have a pension up to the value of 2 million. At retirement, you can take out a lump sum of approx €200k plus another €200k for your spouse's pension tax-free. You put the rest into a pension fund that releases a sum of money to you monthly . . . . you are taxed on this monthly income ! In my opinion, by investing in a pension you are deferring your tax liability to be paid at retirement - your 200k. Who has made money during your pension cycle, the government, pension funds, insurers . . .

By the way I have a company pension but I'm not using it as my main source of income for retirement. I'll probably never retire. Get good tax advice.
 

torblednam

Frequent Poster
What is the Irish System ?
Dividend income is just part of your total income and taxed at whatever rate your total income brings you into.

Paying yourself a dividend rather than a salary is actually much more tax inefficient overall, because your salary is tax deductible for the company (i.e. Reduces the company's profit/ corporation tax) but a dividend is paid out of after-tax profits, so you effectively pay tax on that amount twice - once as corporation tax and then personally as income tax.
 

MikeM

Frequent Poster
So how do you suggest you pay yourself from a company that is the best tax efficient method?
 

Mary55555

Frequent Poster
Hello,

I’ll explain by example in Irish scenarios.

Eg 1 wage from company

Profit before wages and pension= 150k
Wage = 50k ( this will be subject to income tax, usc and prsi)
Profit in company = 100k
Corporation tax = 12.5k

Obviously if you take wage 150k there won’t be 12.5 k of ct due.

Eg 2 dividend from company

Profit before wages and pension= 150k
Wage = 50k ( this will be subject to income tax, usc and prsi)
Profit in company = 100k
Corporation tax = 12.5k

Declare dividend on remaining 87.5k.

The dividend is subject to income tax, prsi and usc in your hand.

So you and your company are worse off by 12.5 as dividend aren’t tax deductible in the company.

Eg 3 wage and pension from company

Profit before wages and pension= 150k
Wage = 50k ( this will be subject to income tax, usc and prsi)
Pension contribution = 100k ( assuming the scheme and rules allow the company to make such an amount)
Profit in company = 0
Corporation tax = 0

The 100k in the pension can grow tax free and provide an income when you come to retire.
 
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