What should we do with secondary limited company income?

Seaniemed

Registered User
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25
Age: 32
Spouse’s/Partner's age: 31

Annual gross income from employment or profession: 70,000

(+ limited company income started March 2021 gross 3500 pm but erratic, not counted in take home pay as wish to build up first)

Annual gross income of spouse: 38,000 (due to drop to 0 in September 2021)

Monthly take-home pay: 6000 (will stay the same in September 2021 due to drawing directors income)


Type of employment: e.g. Civil Servant, self-employed

Both primary incomes public sector

Side income from limited company – not yet realised (have not drawn any salary)

In general are you:
(a) spending more than you earn, or
(b) saving? saving

Rough estimate of value of home 480,000
Amount outstanding on your mortgage: 330,000
What interest rate are you paying? 2.3% plus 300pm overpayment (KBC)
- This is not our "forever" home - a move is contemplated in 5-7 years


Other borrowings – car loans/personal loans etc

Car loan 480pm

House loan 500pm (family loan for unexpected remedial works to house – 30,000 outstanding)


Do you pay off your full credit card balance each month? No CC
If not, what is the balance on your credit card?

Savings and investments:

370 pm AVC (current value 8000)

200 pm investment account (current value 3000)

250pm (plus leftover cash at months end) into savings account (current value 2000)

Business account 15,000


Do you have a pension scheme?

Public sector plus AVC

Do you own any investment or other property? No

Ages of children: 5 months

Life insurance: My death only (I have far higher earning potential in the future even working part time in the event of spouse death) 500,000 lump sum assurance policy separate to PS benefits

Extra info:

Spouse taking unpaid maternity leave in September at which point further LTD earnings will be drawn as her salary (she is a director)

The house loan arose as part of a kitchen fitout (budgeted and saved as 20,000) which escalated to major remedial works arising out of structural/damp issues. Total project cost 60,000 – unexpected which wiped out previous savings. This finished in January 2021 but left us financially and emotionally drained.



Medium-long term: Salary projected to take a hit in 3 years for 2-4 year period after which my income will likely triple to anything between 150,000-250,000



Advice sought:

What should we do with the director income (beyond tax-efficient salary to spouse)? Is it silly to leave in account at mercy of corporation tax or should we draw as much as possible by years end? Can’t contemplate investments as we will likely need to draw on the cash in 3 years. This is a service-based company with no capital assets or liabilities to speak of. I bill for services rendered and spouse handles administrative duties.
 

Brendan Burgess

Founder
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44,666
Are you making 3,500 per month "profit" in the limited company?

In general, you don't want to pay any Corporation Tax. So you should pay or accrue salary at the year end to eliminate the profits. Alternatively, you should probably make your pension contributions via the company rather than via AVC, as you will get relief from USC and PRSI as well.

I think you should stop making AVCs anyway. Use the money to clear your car loan and other loans. That seems like a higher priority.

The 20% tax band for a married couple is €44,300 for a single income and €70,600 for a joint income.

So your wife will be taxed at 20% on the first €26,300 of income she earns. If you earn this money instead of her, you will be taxed at 40% on it. Talk to your accountant as to whether the work she does justifies a salary of €26,300 from the company. I am not a tax specialist, but I gather that Revenue tends to accept these arrangements.
 

Brendan Burgess

Founder
Messages
44,666
If you have built up €15,000 in the company, you should pay it out to yourself as salary. You will be doing so by the year end anyway, so you might as well do it now.

Use the €7,500 or so of net income to clear the car loan?

You don't tell us the balance on the car loan or the interest rate. Assuming it is more than the mortgage rate of 2.3%, you should be overpaying it rather than the mortgage.

You should have a credit card for emergencies. Then you would not need to build up an emergency fund or investment fund. These could then be used to clear your interest charging loans.

Brendan
 

Brendan Burgess

Founder
Messages
44,666
OK, I have just realised that you are 31.

Plenty of time for pension contributions.

Stop making AVCs and don't use the company income for this.

Your priority is to be able to trade up in 5 years. So clear your personal loans and then start overpaying your mortgage.

When you have traded up and you know where you stand, you will have plenty of time to stuff your pension fund.

Brendan
 

Seaniemed

Registered User
Messages
25
Thanks Brendan.
The 3500 is "profit" (we have minimal expenditure other than salary) - but I have been a state employee all my life so excuse any misinterpretation of terms.

I suppose the limited view I had taken on AVCs in general was that they reduced the tax burden on us as a family - considering that at the end of the year we would have accrued approx 40,000 in the business we were looking to make the tax bill as efficient as possible - and after paying a "living salary" for her to replace her income lost when on maternity leave, we were thinking of paying into AVCs.

Paying down the loans are the best option - I had just wondered of the merits of leaving cash in the business.

The car is on PCP - so will leave it as is for now. The aim is to clear the house loan.
 

Brendan Burgess

Founder
Messages
44,666
Paying down the loans are the best option - I had just wondered of the merits of leaving cash in the business.

Discussed in lots of other threads. Not advisable unless you have a medium-term written plan to shut the business and avail of Retirement Relief or Entrepreneurial Relief.

In your personal situation, you need cash as you are heavily borrowed and you want to trade up. So get the cash out into your hands and not into a pension fund.

The car is on PCP - so will leave it as is for now. The aim is to clear the house loan.

That is the right approach as long as you have the balloon payment available when the PCP ends.

Brendan
 

Seaniemed

Registered User
Messages
25
Thanks Brendan yes by the time PCP is up a balloon payment will be available.

I'll meet with the accountant to discuss drawing it all as a salary
 

Aladdin

Registered User
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34
Discussed in lots of other threads. Not advisable unless you have a medium-term written plan to shut the business and avail of Retirement Relief or Entrepreneurial Relief.

In your personal situation, you need cash as you are heavily borrowed and you want to trade up. So get the cash out into your hands and not into a pension fund.



That is the right approach as long as you have the balloon payment available when the PCP ends.

Brendan

Curious - we've always been advised building up surplus cash in the company is more tax efficient than taking it as salary. Why would it be inadvisable to do so Brendan?
 

RedOnion

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Curious - we've always been advised building up surplus cash in the company is more tax efficient than taking it as salary. Why would it be inadvisable to do so Brendan?
In Ireland?
Unless there's a clear strategy on how to extract cash tax efficiently in future, then don't leave it there. Especially if subject to close company surcharges.
 

Aladdin

Registered User
Messages
34
In Ireland?
Unless there's a clear strategy on how to extract cash tax efficiently in future, then don't leave it there. Especially if subject to close company surcharges.
Yes in Ireland. It's a limited company with ourselves as directors and we pay ourselves enough to avail of tax-free allowances exemptions and leave remainder in the company bank account. A while ago so I'm sketchy on the details now, but I believe accountant mentioned something about taking it out as a lump sum in our mid-fifties or somesuch?
 

RedOnion

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A while ago so I'm sketchy on the details now, but I believe accountant mentioned something about taking it out as a lump sum in our mid-fifties or somesuch?
Talk to your accountant, and get clarification on the plan. In writing. And review it every few years in case the tax rules have changed and the plan is no longer valid.

There might be scope to avail of retirement relief or something, but unless there's a specific plan in place it's generally not efficient to leave cash which is not needed within a company.
 
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