Increased Income & Optimizing Finances

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walkthedog

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Personal details

Age: 39
Spouse's age: 39

Number and age of children: 1, age 3

Income and expenditure
Annual gross income from employment or profession: €150,000
Annual gross income of spouse/partner: NA

Monthly take-home pay: €4000/5000, depending on needs

Type of employment - Self-employed.

In general are you: Saving. We don’t spend a lot.

Summary of Assets and Liabilities
Family home value: €400000 (Mortgage paid in full)
Cash: €30,000
Defined Contribution pension fund (Self): €140,000
Defined Contribution pension fund (Spouse): €45,000

Total net assets: €665,000

Pension information

Total Value of pension fund: €195,000 (See above)

Other information which might be relevant
* Last year I quit my job to start my own business (Limited Company). It was slow at first, but this year business has really increased. I and my spouse have private pensions (see above) from previous employment. We have not yet taken any action with them in terms of leaving options (e.g transfer to PRB etc.).
* Our mortgage is paid off, and we have a 3 year old. We don’t spend much, and are happy that way.
* I now find myself in a situation where company profit is building up, and I am unsure of how to best use it.

What specific question do you have or what issues are of concern to you?

1. I want to start a new private pension to funnel some profit there. Ideally I’d like to be able to avail of pension early if possible. I also want to self-administer in terms of selecting funds, ETFs etc. What suits best for my situation? A PRSA, a Directors Pension? Should I speak to a pension broker?

2. Are there other tax-efficient ways to utilize the company profit? Should I employ and pay my spouse? (They are currently a stay at home parent). Currently I can only utilize tax relief for the lower married rate, as only one of us is employed.

3. I’ve heard of something called Entrepreneur relief? Is this something I could make use of to be tax-efficient?

4. What should I do with our old company pensions? Move them to Personal Retirement Bonds? Leave them where they are?

5. I’ve considered paying a financial advisor. I’ve no problem paying for advice! I’ve searched and read posts about FAs. I don’t want anyone to be providing biased commission-based advice, and I don’t need anyone to manage my finances. Really, I just want someone who can answer my questions (above) and tell me what I don’t know (which is likely a lot! ).

To summarize my ‘problem’ - Increase income via Limited Company. Low expenditure, and want to be tax-efficient as possible. Also want to sort out old company pensions if needed.

Thanks in advance.

Also, for some reason the text would not change back to non-italic!
 
This worries me:

Monthly take-home pay: €4000/5000, depending on needs
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The key issue for you is how to take surplus cash and profit out of the company in a most tax-efficient manner. The amount you take out should not be dependent on your needs.

Generally speaking, it is not a good idea to leave cash and profits in the company as it will be taxed twice - once by Corporation Tax and again, when you take it out, whatever way you take it out.

So max your pension contributions before the company's year-end so that they can be a deduction against profits.

Then take any remaining profit out as salary. You can accrue salary at the year-end to eliminate profits, but you must pay it to yourself within 6 months of the year-end.

The pensions world has become complicated. I will leave it to others to work out which is the best pensions vehicle for you.

Brendan
 
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Can your spouse work for your company ? Even just during pre school hours ? That would bring income into your family form the business too and use up their unused tax credits/bands ? Also would offering yourselves health insurance as a benefit be of use? Most large companies offer this as a flat benefit regardless of salaries or hours worked.
 
As you are a company director, you can put a lot of money into a PRSA and claim tax relief in the year it is paid. If your spouse is a director in the business, you can pay them a modest fee for their directors duties. As long as they have a bona fides income from the business, you can also make large pension contributions to a PRSA from the company into a plan in their name.

Leave the €30,000 in cash as it may be needed for cashflow.

I would also look at planning for future costs for the kids. They get expensive as they get older and then there is education costs on top of that. Some medium term investments may be required.

If you are the business, you need to protect your family financially from premature death, so ensure your life cover and income protection is up to date.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Steven Barrett said:
Leave the €30,000 in cash as it may be needed for cashflow.
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Hi Steven

If it's a company which generates a lot of cash, this is not necessary.

It's more tax-efficient to eliminate profits at the year-end by accruing salary.

The salary must be taken out within 6 months.

So, in a sense, you can leave cash in the company for 6 months, before taking it out.

If the company subsequently needs cash, he can lend it back to the company.

Brendan
 
Brendan Burgess said:
Hi Steven

If it's a company which generates a lot of cash, this is not necessary.

It's more tax-efficient to eliminate profits at the year-end by accruing salary.

The salary must be taken out within 6 months.

So, in a sense, you can leave cash in the company for 6 months, before taking it out.

If the company subsequently needs cash, he can lend it back to the company.

Brendan
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He already has it in his personal account.

And if he runs a small business, there is the continual fear of the stream of strong cashflow running out. I speak to small business owners all the time, some that are making huge profits and the fear is always the same, this may stop at any time, so lets make hay while the sun shines.

It is always good practice to have personal funds at hand. If the cash in the business does dry up and there is a need for money, where will he get it from?
 
Thanks everyone for the input and information so far, all very useful and I really appreciate it.

Based on the above, my current thinking in terms of definite or possible actions are:

* Definite - Start a PRSA, and max the contributions
* Possible - My spouse is named as a secretary for the company (required during company setup), and so maybe I could pay them a salary. Unsure of this, but might investigate. As mentioned this might enable efficient use of tax credits etc.
* Possible - Medium term investments for child costs, education etc.

So, my first action would be PRSA.

Am I missing anything else?

Thanks again.
 
walkthedog said:
* Possible - My spouse is named as a secretary for the company (required during company setup), and so maybe I could pay them a salary. Unsure of this, but might investigate. As mentioned this might enable efficient use of tax credits etc.
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Don't do this without having first obtained professional advice on its wisdom or otherwise as an idea. Revenue frown upon it and it can get very messy if you make mistakes.

As your company is doing well, you really need to have a trusted accountant/tax advisor who can guide you on matters such as this.

In general, I think anyone who is self-employed, with a family to support and with their spouse not working will sooner or later find themselves in a precarious financial position if anything goes wrong in the business

In your case, you might think you're safe if your company is currently earning €150k p.a. but I've seen people in similar circumstances finding themselves under serious financial pressure.
 
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If your spouse is genuinely doing work then it should be fine ? I assume if you have certain expertise that they could cover off the non value adding administrative tasks for example ? Or research or finance tasks?

Not sure how it works but if you are planning more children would employment like this build up entitlements for mat benefit or PRSI towards pension (albeit that is covered maybe by homemakers scheme).
 
T McGibney said:
Don't do this without having first obtained professional advice on its wisdom or otherwise as an idea. Revenue frown upon it and it can get very messy if you make mistakes.

In general, I think anyone who is self-employed, with a family to support and with their spouse not working will sooner or later find themselves in a precarious financial position if anything goes wrong in the business

In your case, you might think you're safe if your company is currently earning €150k p.a. but I've seen people in similar circumstances finding themselves under serious financial pressure.
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Thanks T McGibney, pragmatic advice regarding the wisdom of employing spouse. I’d also hesitate to do this due to possible complications.

No misemoi, spouse would not genuinely be doing core work, possibly could offload some admin, but it’s a business which involves a very specific skillset.

Re: possible precarious financial position T McGibney - do you have any recommendations/advice specific to my situation which you think could help to mitigate against such possibilities?
 
walkthedog said:
Thanks T McGibney, pragmatic advice regarding the wisdom of employing spouse. I’d also hesitate to do this due to possible complications.

No misemoi, spouse would not genuinely be doing core work, possibly could offload some admin, but it’s a business which involves a very specific skillset.

Re: possible precarious financial position T McGibney - do you have any recommendations/advice specific to my situation which you think could help to mitigate against such possibilities?
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you could easily give your spouse a role as your executive assistant or admin support, just make sure you have a proper employment contract, payroll set up correctly, etc etc
 
walkthedog said:
Re: possible precarious financial position T McGibney - do you have any recommendations/advice specific to my situation which you think could help to mitigate against such possibilities?
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Arrange things in such a way that your spouse builds their own career in an employment totally separate to your business.

This may conflict with your long term joint plans and/or outlook on life but I think it's worth pondering nonetheless.
 
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