# Tax planning - company profits or director's salary?



## Brendan Burgess

This is my understanding of the rules and proper strategy. Pay an accountant for tax advice before taking any decisions based on this information.

Year end 31 December 2004

Profit before paying anything to director  50k
Salary already paid during the year         40k
Profit per draft accounts:                     10k

*If you leave the profit in the company...
*Corporation Tax on profit at 12.5%          1250
Amount left in the company:                   8750

Pay this as salary the following year   
Income tax and PRSI at 47%                              4112
Net pay into your hand                         4637.50

Effective tax rate on 10k profits             53%

*So you are better off paying the 10k as profits in 2004
*You can pay this via the PAYE system in 2004 if you know your profits.

Or you can accrue it in the accounts as long as you pay it by the end of June 2005. 

*To make matters worse...
*If you leave the profits in the company and it is a service company, you will pay a further surcharge tax on undistributed professional income. 

Paying dividends is very tax inefficient for various reasons. 

*Let's say you want to keep some profits in the company in case of a poor 2005...

*Let's say that the profit before paying anything to the director is nil in 2005. 

You can leave the 10k profit in the accounts for 2004 and pay 12.5% Corporation Tax on it. You can pay yourself 10k salary in 2005 which will be subject to little or no tax. 

You will have made a loss for Corporation Tax purposes in 2005, which you can carry back against the profit for 2004 and get a refund of the Corporation Tax paid. 

*You may also want to leave money in the company for capital expenditure
*If the company needs a lot of capital, then just leave the money in the company and pay the 12.5% corporation tax. 

If it's a small amount of money, you might consider paying all your profits as salary and lending the money to the company for the capital expenditure. 

*Consider making a pension contribution
*If you expect very big profits in 2004 and don't need the money, your company  may make a contribution to your pension scheme before the year-end. I don't think it can be paid in 2005 and backdated against 2004 profits.


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## ubiquitous

Brendan said:
			
		

> *If you leave the profit in the company...
> *Corporation Tax on profit at 12.5%          1250
> Amount left in the company:                   8750
> 
> Pay this as salary the following year
> Income tax and PRSI at 47%                              4112
> Net pay into your hand                         4637.50
> 
> Effective tax rate on 10k profits             53%
> 
> *So you are better off paying the 10k as profits in 2004
> *


*

Loss relief can be used to offset a current year loss against profits of the preceding year. Hence the double tax charge indicated above will not always apply. For example if the payment of additional salary generates a tax loss in year 2, the Corporation Tax bill in year 1 is recovered.

The surcharge on undistributed service company income is applied very narrowly in practice to the point that it is irrelevant in almost all scenarios where the taxpayers are properly advised.




			If it's a small amount of money, you might consider paying all your profits as salary and lending the money to the company for the capital expenditure
		
Click to expand...


I would regard this as very poor advice.*


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## Brendan Burgess

> Loss relief can be used to offset a current year loss against profits of the preceding year. Hence the double tax charge indicated above will not always apply. For example if the payment of additional salary generates a tax loss in year 2, the Corporation Tax bill in year 1 is recovered.



Hi Ubi

Is that not clear from my explanation? In the bit under: *Let's say you want to keep some profits in the company in case of a poor 2005...

*


> If it's a small amount of money, you might consider paying all your profits as salary and lending the money to the company for the capital expenditure.



I think it's important to stress that I am not advising this in the same way as I advised against leaving profits in the company. I am saying that you "might consider".  I think that you should consider it. If you do the calculations or get your accountant to do the calculations, you will probably find that it is not worthwhile. But I don't think it's bad advice to consider something. 

Brendan


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## ubiquitous

Hi Brendan

Point taken. However I still can't see how it could be beneficial tax-wise for a company director to pay themselves additional salary and lend the net proceeds back to the company. There might be a benefit in inflating salary in this way in order to secure a higher mortgage, or it might be necessary in order to sort out an existing directors loan problem in the company but otherwise I can't see any tax benefit.


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## Brendan Burgess

Hi Ubi

It's a pretty arcane point, so I think it would distract from the key strategic issues on directors' salaries vs. profits. I have emailed you my thoughts on the issue.

Brendan


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## DirtyH2O

So if I have a limited company whose business is professional services and I want to retain profits to invest in equities after paying corporation tax it is not a viable option?


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## bazermc

DirtyH2O said:


> So if I have a limited company whose business is professional services and I want to retain profits to invest in equities after paying corporation tax it is not a viable option?


 
Just pay the corporation tax, its only 12.5% of taxable income, assuming all trading income.  

I note you carry on a profession, are you familiar with the surcharge on undistibuted service income of a close company (a co with less than 5 shareholders or directors who act as shareholders),  it serves to ensure any post tax retained profits are taxed at a further surcharge at 7.5%


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## DirtyH2O

I was. The earlier quote

_The surcharge on undistributed service company income is applied very narrowly in practice to the point that it is irrelevant in almost all scenarios where the taxpayers are properly advised._

was the opposite to the advice I received from an accountant. I was interested in retaining profits and only paying what I needed. I already have after tax funds available to me so I don't have a need for a high salary. i am not sure which advice is correct. So if I meet the definition of a close company I am liable for the 7.5% tax. I had abandoned the idea of retaining profits in the company due to this factor. It's not much of an encouragement to grow a company should I wish to diversify into different business areas.


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## ubiquitous

DirtyH2O said:


> I was. The earlier quote
> 
> _The surcharge on undistributed service company income is applied very narrowly in practice to the point that it is irrelevant in almost all scenarios where the taxpayers are properly advised._
> 
> was the opposite to the advice I received from an accountant. I was interested in retaining profits and only paying what I needed. I already have after tax funds available to me so I don't have a need for a high salary. i am not sure which advice is correct.



The advice above and your accountant's advice are not opposites. The main reason the surcharge on undistributed service company income causes very few problems in practice is because directors/shareholders of small companies, when properly advised, will avoid having excessive amounts of retained income sitting within service companies and more generally will avoid having rental/investment assets within any form of limited company structure. It makes no sense to have assets growing within a limited company when it is much cheaper tax-wise to own these in the name of the shareholder.


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## DirtyH2O

Thanks for the advice. It seems clear that the best route is to take the money out as salary or else incur additional taxes and further complications in the future.


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## Firefly

From : 


(4)     
(a)     Where for an accounting period of a service company the aggregate ofâ€“


[ (i)     the distributable estate and investment income, and


(ii)     50 per cent of the distributable trading income, ] 1


If say a company has no distributable estate and investment income and pays it's shareholders/directors 50% of its trading income in salaries, then I presume the amount retained is not subject to this undistributed services income surcharge? Can anyone please clarify this?

Thanks,

F.


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## Paddy199

Salaries don't count as a distribution. You must make a distribution i.e. dividends or pay the surcharge. 

OR 

Ensure you have insufficient distirbutable reserves to make the distribution. Remember, to make a distribution out of insufficient reserves is illegal (company law), and you can't be doing something illegal so tax law excuses the surcharge in these circumstances. 

So what I am saying - when the time comes to calculate and pay the surcharge i.e. 18 months after the year end, ensure your reserves and insufficent.


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## kennyb3

I know this is an old enough thread but there are a few recent posts so I thought i'd add something to it.

In a lot of cases directors extract profit (over and above what they require to live on) so that the company breaks even. They may even leave this to be drawn at a future date as a directors loan.

However consideration should be given to a more long term approach - leaving the profit in and building up the reserves and availing of retirement relief via a share buy back when hitting the age of 55. This can be an excellent way of getting money out of a company tax free (€750k per director assuming all conditions satisfied and no other life time use of limit).

The main caveat is that this is a relief that might be downgraded significantly from 2012 onwards.


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## Gekko

kennyb3 said:


> I know this is an old enough thread but there are a few recent posts so I thought i'd add something to it.
> 
> In a lot of cases directors extract profit (over and above what they require to live on) so that the company breaks even. They may even leave this to be drawn at a future date as a directors loan.
> 
> However consideration should be given to a more long term approach - leaving the profit in and building up the reserves and availing of retirement relief via a share buy back when hitting the age of 55. This can be an excellent way of getting money out of a company tax free (€750k per director assuming all conditions satisfied and no other life time use of limit).
> 
> The only caveat is that this is a relief that might be downgraded significantly from 2012 onwards.


 
That isn't the only caveat.

It's a mistake to allow tax to drive the agenda.  There may also be commercial reasons for not allowing money to accumulate in a company.

And as you've alluded to, the Commission for Taxation recommended reform in the retirement relief/business property relief areas, so long term planning in relation to these reliefs may be futile.


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## kennyb3

Gekko said:


> That isn't the only caveat.
> 
> It's a mistake to allow tax to drive the agenda. There may also be commercial reasons for not allowing money to accumulate in a company..


 
Obviously but this is a *taxation *forum so obviously the taxation rather than commercial aspect is focused upon.



Gekko said:


> And as you've alluded to, the Commission for Taxation recommended reform in the retirement relief/business property relief areas, so long term planning in relation to these reliefs may be futile.


 
It's still worth considering if you are in your 50's. Its unlikely to go from €750k to nil in 2012.


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## sandyh2001in

Just wondering how the idea that the surplus profit left in the company should be taken out as salary at 47 percent tax is being promoted so readily ? 
Are we saying that there isn't a way to save any further tax on this profit?


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## Brendan Burgess

I haven't had to visit this issue for some years, but I have just been asked my opinion by a friend who is a director of a company. 

He has been told by his accountant that he must pay all his profits as salaries for 2013 in the month of December 2013.  The accountant dismissed the idea that the salaries could be accrued and paid later. 

The particular business is tight from a cash point of view and the directors have lent money to the company.  They will be making cash flow worse by paying themselves salaries in December because they will have to pay around 50% of it in income tax and prsi within the next few days. 

I have advised them to stop paying themselves salaries and repay the loans from the directors instead. 

They need to make a decision in June 2014 and set the accrual at that stage.


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## T McGibney

Brendan Burgess said:


> He has been told by his accountant that he must pay all his profits as salaries for 2013 in the month of December 2013.  The accountant dismissed the idea that the salaries could be accrued and paid later.



Seems strange but we don't know the context and there may be issues there that we're not aware of.


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## kennyb3

Brendan Burgess said:


> I haven't had to visit this issue for some years, but I have just been asked my opinion by a friend who is a director of a company.
> 
> He has been told by his accountant that he must pay all his profits as salaries for 2013 in the month of December 2013.  The accountant dismissed the idea that the salaries could be accrued and paid later.
> 
> The particular business is tight from a cash point of view and the directors have lent money to the company.  They will be making cash flow worse by paying themselves salaries in December because they will have to pay around 50% of it in income tax and prsi within the next few days.
> 
> I have advised them to stop paying themselves salaries and repay the loans from the directors instead.
> 
> They need to make a decision in June 2014 and set the accrual at that stage.



Post isn't really clear. Is the company making profits but just short of cashflow on a short term basis?

If it's loss making - little point declaring salaries (dec 13 or june 2014), paying tax on same, only to be ploughing it back in (possibly never to be repaid).

Really you'd need to give a more rounded position of the company situation to get proper analysis.


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## Brendan Burgess

Hi Kenny

The company is making healthy profits after paying fair salaries to the directors - probably in the order of €100,000. 

But the working capital demands are high, so they would have to borrow from somewhere to pay the €100,000 in gross salaries in December. They have a big paye and prsi bill in January. 

I have told them that they do not need to pay it until June 2014.  In their accounts, they can accrue the salaries. 

Brendan


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## Brendan Burgess

T McGibney said:


> Seems strange but we don't know the context and there may be issues there that we're not aware of.



Thanks Tommy.

To be honest, I think it's just poor advice from their accountant.  

In most cases where this issue has arisen, the advice from the accountants has been either non-existent, poor or incorrect.  In this case, it seems that is clearly incorrect. I was just wondering if the principle had changed since I wrote this Key Post 9 years ago.


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## 44brendan

Brendan Burgess said:


> He has been told by his accountant that he must pay all his profits as salaries for 2013 in the month of December 2013. The accountant dismissed the idea that the salaries could be accrued and paid later. .


Begs the question as to what he is paying his accountant for. Surely he must now ask his accountant why he is making this recommendation and why salaries should be paid out by the company. At face value the recommendation does not make sense and as such the accountant should be asked for more detailed information.


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## Brendan Burgess

As Tommy says, there may be issues which justify the advice, although I can't  imagine what they might be. 

It's also possible that the client has misunderstood the accountant, although that seems unlikely in this case.

It's probably good practice for a client to get the general tax planning strategy in writing, so that they fully understand it and can get a  second opinion on it.

Brendan


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## dublin66

Under the tax rules the situation here is very clear - the PAYE must be paid within 6 months in respect to unpaid remuneration.  This provision is contained in section 996 TCA.  As we have all done this is normally done via a supplementary P35 (for year end situations).

 In the past not only have I seen accountants not being aware of this provision but tax inspectors have also not known.


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## Brendan Burgess

I don't see why you would need a supplementary P35? 

If you accrue €10,000 at 31 Dec 2013 and actually pay it in June 2014 as normal, does that not meet the requirements? 

Here is the actual wording of Section 996



> (2) Where remuneration (in this section referred to as “unpaid remuneration”)  which is deductible as an expense in computing the profits or income of  a trade or profession for an accounting period or period of account for  the purposes of Schedule D is unpaid at a relevant date—
> 
> (_a_)  the unpaid remuneration shall be deemed to be emoluments to which this  Chapter applies and shall be deemed to have been paid in accordance with  _subsection (3)_, and
> 
> ...
> 
> 
> 
> (4) This section shall not apply to unpaid remuneration paid before—
> 
> (_a_) the date of expiry of 6 months after the date (in this subsection referred to as “the deemed date”) on which that remuneration is by virtue of _subsection
> 
> _





Brendan


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## brenbrady

Brendan Burgess said:


> I don't see why you would need a supplementary P35?
> 
> If you accrue €10,000 at 31 Dec 2013 and actually pay it in June 2014 as normal, does that not meet the requirements?
> 
> Brendan




Section 996 is just referring to the "remuneration" but they would have to submit the P35 by the 15th February. Once they accrue for the salary (if that's what they want to do) and pay the PAYE/PRSI due and include it in the P35 then there shouldn't be an issue. There's no requirement for undistributed profits to be drawn down as salary. The only other explanation is that the accountant is helping them avoid the close company surcharge on undistributed income for professional service companies.


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## Brendan Burgess

Hi bren

1) They have decided they want to accrue €100k in directors' salary and thus not make any profits for CT purposes. 

2) They will pay this accrued salary in June 2014. 
3) They will do their normal monthly PAYE return in July 2014 for June 2014 and pay over the appropriate PAYE and PRSI

They don't need to show the accrued salary in the P35 for 2013.


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## WindUp

Per this it needs to be in the 2013 if padi after June

http://www.askaboutmoney.com/showthread.php?t=169774


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## Brendan Burgess

Correct. 

The salary should be actually paid before 30 June.

If it's paid after that, interest is charged on it.

Brendan


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## dublin66

It is correct that there is no technical requirement to file a supplementary P35.  The reason for filing one is purely practical - a P35 (initial or supplementary) allocates earnings and tax deducted to a particular year.  For example if your vote fees for the year ending 31 December 2013 and pay the tax on a P30 in June 2014, for example, the fees will relate to the 2013 year of assessment but the attaching tax credit would be paid by June 2014 (and be filed with the P35 for 2014) - you can imagine the difficulty of trying to get the tax office to reallocate the June PAYE/PRSI etc to the 2013 year of assessment.  In the olden days when you had employer units that had the technical skill to understand the finer points it may have been possible. I would not like to have to spend a long time dealing with a call centre trying to get credit for PAYE paid 2014 against 2013 income.  By filing a supplementary P35 this difficulty does not arise.  

From memory the net effect of section 996 is to deem the accrued earnings to accrue evenly over the accounting period that the earnings relate to - i.e. this is the link to the year of assessment.  Path of least resistance is my approach on such issues.

Brendan - I'm not sure I agree with post #29 above - the legislative requirement is that the PAYE is required to be paid within six months and not the fees.  I don't think the Revenue would particularly mind when the fees are drawn down provided the PAYE etc is paid.


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## Brendan Burgess

dublin66 said:


> Brendan - I'm not sure I agree with post #29 above - the legislative requirement is that the PAYE is required to be paid within six months and not the fees.  I don't think the Revenue would particularly mind when the fees are drawn down provided the PAYE etc is paid.



Hi dublin



> (4) This section shall not apply to unpaid remuneration paid before—
> 
> (_a_) the date of expiry of 6 months after the date (in this  subsection referred to as “the deemed date”) on which that remuneration  is by virtue of _subsection _



It refers to remuneration rather than PAYE. Of course, once the remuneration is paid, the PAYE becomes due.


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## Brendan Burgess

I still don't see the need for a supplementary P35 unless the salary was below the annual tax credits for the year.


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