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Withdrawing profits from your Company can be costly. If you draw extra profits down as income you will most likely pay 40% Income Tax along with PRSI, USC and Company PRSI. Similarly, any dividends taken from the Company are also taxable and have further complications.

Funding an Executive Pension Plan is a more tax efficient way of extracting money from your Company. One of the main advantages of paying into an Executive Pension Plan is that any employer contributions to an approved pension scheme made on your behalf are treated as a business expense which means they are deductible for Corporation Tax purposes in the Company. This allows for a Corporation Tax saving in the Company of 12.5% of the total premiums paid.

Taking money out of your Company by way of company pension contributions rather than increasing your salary has several more tax advantages:

• 1)Income tax does not apply to the pension contribution – a saving of up to 40%.
• 2)Personal and company PRSI does not apply.
• 3)USC does not apply.
• 4)There is no Benefit in Kind chargeable to you in respect of this contribution.
• 5)The money accumulated in the pension grows tax free until retirement.
• 6)A tax free lump sum can be taken when you reach retirement (usually 60 to 70 years but even as early as age 50 if you are no longer working in the Company) subject to conditions.

Example: Mary owns her own Limited Company and draws an annual salary of €50,000 from it. The Company’s annual profit is €100,000, after paying Sandra her salary of €50,000. This gives a Corporation Tax bill of €12,500 (12.5%). Sandra would like to extract more profits out of the Company without paying the higher rate of Income Tax. In order to do this she can start an Executive Pension Plan. If Sandra takes a salary of €50,000 and invests a further €50,000 of the €100,000 remaining Company profits into her pension the Company’s Corporation Tax bill will fall to €6,250 (12.5% of the remaining €50,000 profits) rather than €12,500. Furthermore, no Income Tax is payable on the €50,000 that is withdrawn from the Company to invest in her pension. By investing in a pension Sandra is actually extracting €100,000 from her Company, yet only paying personal tax on her €50,000 salary and corporation tax on €50,000 of the company profits.

This simply shows you how to extract money from a Company and make it work for you personally. The contribution must be made before your year end, so if that is 31^st December you need to consider getting advice as soon as possible so contact your Qualified Financial Advisor today!

Lisa Doherty, QFA RPA is a Qualified Financial Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on lisad@jfl.ie