What is better to take from a limited company: salary or dividends?

[CuriousCork]

A friend of mine is "parking" his consultancy company, which he owns 100%, to commence a one year full time Master's degree. His company has accumulated profits of €80,000. He needs money to live on for the year, and he needs advice as to whether he should take a salary of €17,000 or dividend income of €17,000.

He has picked an income level of €17,000 in order to avoid paying any income tax.

It appears to me that it makes no difference whether he takes salary or dividends? Any alternative views?

 

[Brendan Burgess]

I am not a tax specialist, but I think that salary is better.

It is an expense of the company, so the company will create a loss which might be useful against future earnings. (Or if he had taxable profits last year, he could set the loss against last year's profits.)

Or, if he undertakes some work through the company, he could set the salary against the income.

He would also have an extra year of PRSI on his salary which might help for his SW or pension entitlements.

Dividends come out of reserves and are not an expense of the company.

Brendan

 

[T McGibney]

Your friend should be availing themselves of of some decent professional advice, as the very fact that they're considering dividends as an option suggests they have at best a sketchy understanding of how the tax system impacts them.

For example, if they receive a €17k dividend in a given year, they will ceteris paribus most definitely not avoid paying any income tax.

 

[Brendan Burgess]

Hi Tommy

Surely there are general principles involved here?

For the amounts involved, do they really need to be annoying an accountant and paying professional fees?

Or would an accountant deal with it over the phone and charge a minimal amount?

Brendan

 

[T McGibney]

For the amounts involved, do they really need to be annoying an accountant and paying professional fees?

Or would an accountant deal with it over the phone and charge a minimal amount?

For the tax-efficient extraction of €80 grand from a company account?

Come on, Brendan...

 

[CuriousCork]

It is an expense of the company, so the company will create a loss which might be useful against future earnings. (Or if he had taxable profits last year, he could set the loss against last year's profits.)

Thanks Brendan. Good idea. He has decided to take it as salary and reclaim the losses against corporation tax paid in previous years.