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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.

An alternative and more tax efficient way of extracting this money is through an Executive Pension Plan. 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.

There are 4 distinct tax advantages of taking money out of your Company by way of pension contributions rather than by extra salary:

1. You pay no Income Tax on the contribution made to the pension – a saving of up to 40%.

2. There is no Benefit in Kind chargeable to you in respect of this contribution.

3. The money accumulated in the pension grows tax free until retirement.

4. A tax free lump sum can be taken when you reach retirement, subject to conditions.

Example: Sandra 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 Furthermore, no Income Tax is payable on the €50,000 that is withdrawn from the Company to invest in her pension.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 tax on her €50,000 salary.

This simply shows you how to extract money from a Company and make it work for you personally!

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