As we all hope that Ireland will see a much-deserved Indian summer, the minds of business owners are concentrated on the remaining months of 2023 and finishing the year on a strong note. Your focus is very much on making sure your targets for this year are achieved, while also setting your business up for a strong year in 2024.
Alongside this short-term focus, and typically once you reach the age of 50 or so, your mind is usually quite occupied also with achieving your personal wealth goals on the back of your business success. Cash extraction is an essential part of business planning and personal wealth management. When done in a strategic way, it will enable you to transfer profits tax-efficiently out of your company into your own name.
However it’s also somewhat of a minefield, as there are several ways you can extract wealth from your company, each with their own advantages and disadvantages.
Careful planning is needed when choosing one or a combination of cash extraction options, as there is often a trade-off between taking more income and paying tax today, extracting wealth in other ways now or keeping reserves in the business.
You can’t just muddle along
Some business owners believe they are doing the right thing by focusing 100% on their business and its needs today, while working on the basis of the future taking care of itself. This is understandable, but a flawed approach that could result in lost opportunities in turning company assets into personal wealth. It is crucial to get specialist advice that will help you develop the optimal plan for wealth extraction and business exit.
The good news is that when compared to employees, business owners have the benefit of having more control over how you take income and extract profits from the company. But this variability with regards to income and taking profits requires careful planning each year.
Tax sits at the heart of the matter
Having a high potential tax liability is a symptom of achieving successful financial outcomes, but like fees and charges, nobody wants to pay more in tax than they have to. Tax planning is a crucial aspect of cash extraction, and it can be helpful to understand how it impacts your business when designing financial and investment plans.
Simply retaining profits within the business leaves them subject to Corporation Tax. While the “headline” Corporation Tax rate is 12.5%, the rate can vary depending on how the profits were generated. Business owners usually will seek out strategies that reduce this tax liability.
Different strategies have varying tax implications
The big challenge for business owners is how to extract the wealth generated within the business into their personal, or family ownership, to maximum effect. In the following paragraphs, we’ve set out the main areas for consideration. However making the right choices is critical, and your plan must be centred around professional tax advice that considers your specific circumstances.
If you would like to take a “deeper dive” into strategies to be considered in relation to business exit and the importance of aligning your approach with a holistic investment plan, please see our Expert Guide on this subject.
Salary / Dividends
Taking a regular income from a business in the form of salary or dividends is often necessary, as a personal income to meet lifestyle costs. However it must be noted that the associated tax burden can be quite high.
Salary payments to all employees, including owners or directors, are payable from the business before the deduction of corporation tax, but are subject to income tax & PRSI (employee & employer), so have a high effective tax rate for higher earners.
Dividends, which are payable out of after-tax profits, are also subject to Dividend Withholding Tax (DWT) on any dividend payments made to shareholders living in Ireland, so it’s important that you are aware of the rules around paying out dividends.
Director’s Pension Contributions
If your company contributes to a pension on your behalf, then it can be treated as a deductible expense for corporation tax purposes. By making an employer pension contribution, the company’s corporation tax liability is reduced. The amount that an employer can contribute into a pension scheme set up for its owner is limited by a number of factors, primarily relating to their salary levels and their service. However notwithstanding these limitations, employer pension contributions have historically represented a very tax efficient way to transfer value from the company to its owner.
Using Personal Retirement Savings Accounts (PRSAs)
Since late 2022, there is no limit on the level of employer contributions that can be made to a PRSA in any one year, although the maximum amount of pension / retirement savings that you can accumulate (Standard Funding Threshold) is currently €2 million. This maximum is a lifetime limit, when retirement savings from all of your employments are aggregated.
If your spouse or other family members are employed by your company, you can also currently fund their PRSAs to the maximum tax efficient pension (Standard Fund Threshold) of €2m, regardless of how much salary they are paid.
PRSAs have become extremely important and attractive tools for wealth extraction, particularly for highly profitable companies.
Business exit reliefs
The two main business exit reliefs are Retirement Relief and Entrepreneurial Relief. Each have their own characteristics and potential benefits for you, depending on your age at disposal and the proceeds received. Professional tax advice is needed to determine the optimal approach for you.
Underpinning with a structured investment approach is crucial
Whether your wealth is currently tied up within your business, is within your personal control or is a mix of both (usually the case), it is critically important that your investment approach considers your entire portfolio of assets. This approach needs to consider all of your assets to ensure they are invested in a cohesive way, and it also needs to be completely aligned with your wealth extraction plan.
Turning company assets into personal wealth requires a carefully crafted plan and expert advice. Underpinning this with an investment strategy that considers your entire portfolio of wealth gives you the optimal opportunity to ultimately achieve your personal wealth goals.
Again, If you would like to take a “deeper dive” into strategies to be considered in relation to business exit and the importance of aligning your approach with a holistic investment plan, please see our Expert Guide on this subject. Alternatively if you need any help with developing a business exit / investment plan, or have any questions relating to the content of this article, please send me an email and we will set up an introductory call or meeting.
