Year End Focus for Company Directors
Despite the many challenges faced by businesses because of high inflation and cost of living increases, many SME’s have shown remarkable resilience and flourished this year. For businesses with a year end in December, the next 5 to 6 weeks offer them an opportunity to calculate profits for 2023 and look at what options are open to the directors, to extract profits from the company in a tax efficient manner.
The following four paragraphs detail the four options to consider for the profits;
- Leave Profits in the business – Profits left in the company will be subject to Corporation Tax @ 12.5% and for close companies perhaps a further surcharge of 20% if they are not distributed within 18 months.
- Withdraw Profits as Salary – Profits withdrawn in this manner will be subject to Income Tax, PRSI and USC which could be as high as 52% (Income Tax 40%, PRSI 4%, USC 8%)
- Withdraw Profits via an Executive Pension Plan – This continues to be very popular with business owners. Profits withdrawn from the company via an Employer contribution to an Executive Pension Plan, will result in Corporation Tax relief for the company (in the year the contribution is made, subject to revenue limits) and no immediate tax liability for the employee.
- Withdraw profits via a PRSA – At the beginning of 2023 the Finance Act confirmed that there would be no Benefit in Kind for an employee, if an employer made a pension contribution to a PRSA. This now allows for the extraction of company profits via an employer pension contribution to a PRSA, with no upper limit on the Employer contributions. For company directors on low salaries, with large profits, which they want to extract now and obtain tax relief immediately, an Employer PRSA contribution is now an appropriate option.
Employer pension / PRSA contributions will only qualify for tax relief in the year they are made. Unlike personal contributions, they cannot be backdated to the previous tax year. Therefore the importance of good forward planning and taking action before your company year end cannot be stressed enough.
Strategically navigating the intersection of corporate tax savings and pensions can yield to substantial financial benefits for directors. As the landscape of pension regulations and tax law evolves, staying informed and adapting pension strategies accordingly, is key to ensuring continued success in optimising the corporate tax savings and keeping more money on the family balance sheet.
David Peavoy BA, QFA, LIAP is a Director of Peavoy Financial Planning Limited whose practice is based in Office 5b, Portlaoise Enterprise Centre, Clonminam Business Park, Portlaoise, Co Laois.
Peavoy Financial Planning Limited is regulated by the Central Bank of Ireland
Disclaimer: All data and information provided within this blog is for information purposes only. It should not be taken as specific advice for your situation. Peavoy Financial Planning Limited makes no representations as to the accuracy. completeness, or suitability of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries or damages arising from its use