Tax-Efficient Ways for Directors to Extract Cash from a Company

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There are several tax-efficient options for a director to extract cash from a company. The best option depends on the director’s personal circumstances, the company’s financial position, and the purpose of the cash extraction. Below are the most common and tax-efficient methods:

  • Salary or Bonus
  • Dividends
  • Pension Contributions
  • Directors Loan
  • Termination Payments
  • Share Buyback
  • Liquidation
  • Expenses and Benefit In Kind
  • Selling Assets to the company

 

Salary or Bonus

  • How it works: The company pays the director a salary or bonus, which is subject to PAYE, PRSI, and USC.
  • Tax implications:
    • The director pays income tax at their marginal rate (up to 40%), PRSI (4%), and USC (up to 8%).
    • The company can claim a corporation tax deduction for the salary or bonus paid.
  • When to use: Suitable for regular cash extractions but can be costly due to high personal tax rates.

 

Dividends

  • How it works: The company pays dividends to the director as a shareholder.
  • Tax implications:
    • Dividends are subject to income tax at the marginal rate (up to 40%), PRSI (4%), and USC (up to 8%).
    • Dividend Withholding Tax (DWT) at 25% is deducted at source, but this is credited against the director’s tax liability.
    • Dividends are not deductible for corporation tax purposes.
  • When to use: Suitable for shareholders who want to extract profits but are not reliant on regular income.

 

Pension Contributions

  • How it works: The company makes contributions to a director’s pension scheme.
  • Tax implications:
    • Contributions are not taxable in the hands of the director.
    • The company can claim a corporation tax deduction for the contributions.
    • The pension fund grows tax-free, and the director can withdraw up to 25% of the fund tax-free (up to €200,000) upon retirement.
  • When to use: Ideal for long-term planning and retirement savings.

 

Director’s Loan

  • How it works: The company lends money to the director.
  • Tax implications:
    • If the loan exceeds €19,050 and the director has a material interest in the company, the company must pay a 20% tax charge to Revenue (refundable when the loan is repaid).
    • If the loan is written off, it is treated as income and taxed at the director’s marginal rate.
  • When to use: Suitable for short-term cash needs, but not ideal for long-term extraction due to tax implications.

 

Termination Payment

  • How it works: The company pays a termination payment to the director upon retirement or redundancy.
  • Tax implications:
    • Termination payments can qualify for tax-free exemptions (e.g., €10,160 plus €765 for each year of service) or reliefs such as Standard Capital Superannuation Benefit (SCSB).
    • Amounts above the exempt limits are taxed at the director’s marginal rate.
  • When to use: Suitable for directors retiring or leaving the company.

 

Share Buyback

  • How it works: The company buys back shares from the director.
  • Tax implications:
    • If conditions are met, the buyback is treated as a capital transaction and subject to Capital Gains Tax (CGT) at 33% rather than income tax.
    • Retirement Relief or Entrepreneur Relief may reduce or eliminate the CGT liability.
  • When to use: Ideal for directors exiting the company or reducing their shareholding.

 

Liquidation

  • How it works: The company is wound up, and the director receives the remaining cash as a distribution.
  • Tax implications:
    • Distributions are treated as capital gains and subject to CGT at 33%.
    • Retirement Relief or Entrepreneur Relief may apply, reducing or eliminating the CGT liability.
  • When to use: Suitable for directors looking to close the company and extract all remaining funds.

 

Expenses and Benefits-in-Kind (BIK)

  • How it works: The company reimburses the director for business expenses or provides tax-efficient benefits (e.g., an electric car).
  • Tax implications:
    • Reimbursed expenses are tax-free if they are wholly, exclusively, and necessarily incurred for business purposes.
    • Certain benefits, like electric cars (up to €50,000 OMV), can be provided tax-efficiently.
  • When to use: Suitable for reducing taxable income while covering business-related costs.

 

Selling Assets to the Company

  • How it works: The director sells personally held assets (e.g., property) to the company at market value.
  • Tax implications:
    • The director may incur CGT on the sale, but this is often lower than income tax.
    • The company can use the asset for business purposes and claim depreciation or other tax reliefs.
  • When to use: Suitable for directors with assets they wish to monetize.

 

Summary of Options:

Method Tax Rate Best For
Salary/Bonus Up to 52% Regular income needs
Dividends Up to 52% Shareholders extracting profits
Pension Contributions 0% (initial) Long-term retirement planning
Director’s Loan 20% (temporary) Short-term cash needs
Termination Payment Tax-free (limits apply) Retirement or redundancy
Share Buyback 33% (CGT) Exiting or reducing shareholding
Liquidation 33% (CGT) Closing the company
Expenses/BIK 0% (if qualifying) Reducing taxable income
Selling Assets 33% (CGT) Monetizing personal assets

 

The most tax-efficient option depends on the director’s goals (e.g., regular income, retirement planning, or exiting the company). For significant cash extractions, pension contributions, share buybacks, or liquidation are often the most tax-efficient. For smaller or regular amounts, salary, dividends, or expenses may be more practical.

 

If you want to discuss your options and are seeking to extract funds from your company in a tax efficient manner please don’t hesitate to contact a tax advisor at Ecovis DCA so we can assist you with your goals.