This is a question that we are often asked. This week we will return to our “You ask We answer” series of blogs.
Last week we looked at how Comerford Foley could help you set-up a company. We also explored how using our services could help you. To find out more Read here
This is a topic that many business owners ask themselves. What is the best way to take out money from my company? There are many other ways you can get company money working for you. For this blog, we are going to focus on the two most common methods of taking cash from your company. This is either salary or dividends.
We will see what way both work from a tax point of view and will compare them with some examples.
If you take extra salary or a bonus from your company this salary is liable to PAYE, PRSI, & USC in the week or month you take it. The salary or bonus will go through payroll and you pay tax at source. You will get the net amount after taxes.
Jose owns all 100 shares of Special One Limited. The company makes a range of men’s grooming products and mirrors. He wants to take some money out from his company to pay for an extension to the kitchen that costs €15,000. He is a higher rate taxpayer who is on an annual salary of €100,000. All his tax credits and lower rate band go against that salary. His tax rate on the extra salary will be 52% which is 40% Income Tax, 4% PRSI, and 8% USC.
Jose has to pay extra salary of €31,250 to get a net of €15,000. His company will pay the taxes to Revenue as part of the payroll tax liability for the pay period.
The company will get a tax deduction for this extra salary at 12.5%. The company profits will reduce by the amount of the salary. This will result in a Corporation Tax saving of €3,906.
Corporation Tax Saving
When we deduct the Corporation Tax saving from the tax cost of €16,250, the next tax cost to the company is €12,344. This will be 39.5% of the additional salary figure [Personal Tax rate 52% minus Corporation Tax rate of 12.5%]
Jose is quite curious and asks his accountant if there is any other way to take out money from his company. His accountant tells him that he could take a dividend from the company. Jose wonders what he needs to do and what the company should pay as he needs €15,000. To get €15,000 his accountant informs him that he should pay a gross dividend of €20,000 in June 2020. This is €200 per share. The taxes are as follows
|Dividend Withholding Tax [DWT]||25%||€5,000|
When the company pays the dividend, the company will have to make a return within 14 days of the following month. In this case, the company will make the DWT return and pay the tax by the 14th of July. To find out more about dividend withholding tax Read here
Looking at this, you would think that the dividend is the best option. The tax liability is only €5,000 compared to €12,344 when taking the extra salary route.
There will be a sting in the tail for Jose when he files his Tax return for 2020. He will need to file his Tax return for 2020 before the end of October 2021. He would pay tax on the gross dividend as follows:
|Less Credit for DWT paid||25%||€5,000|
|Additional Tax for Jose||27%||€5,400|
This is a timing difference. Jose gets €15,000 net in June 2020 but will have to pay an extra €5,400 tax by the 31st October 2021. This will be part of his 2020 Tax return and liability. So for a gross dividend of €20,000, Jose’s net will get €9,600 after all taxes. In June 2020 he has the full €15,000 to pay for the extension. He will have to stump up €5,400 in 2021 to cover the taxes owing on the gross dividend.
Salary & Dividend is the same amount
Let’s look at a gross dividend of €31,250 for Jose to compare with the extra salary of the same amount, mentioned above.
|Dividend Withholding Tax||25%||€7,813|
You will see that Jose will get a net dividend now of €23,437. Special One Limited will pay the DWT of €7,813 to Revenue by the 14th of next month.
The Income Tax that Jose will pay in 2021, as part of his 2020 Tax return will be as follows:
|Income Tax, PRSI & USC||52%||€16,250|
|Less Credit for DWT||25%||€7,813|
|Additional Tax liability||27%||€8,437|
You will see, when comparing the same gross salary or dividend, the dividend gives you the most cash at first. The tax you pay is the same albeit there is a delay in collecting the balance of Income Tax. This gives you the benefit of having the use of more cash in the short term with the dividend.
From a tax efficiency point of view, the salary is better. Your company will get a tax deduction at 12.5% so the net tax cost is 39.5% compared to 52%.
The above is to give you a general idea of how this works. What is best for you will depend very much on your circumstances. We will explore further, in next week’s blog, how a bonus could give an immediate corporation tax saving. We will also look at how dividends can help with a close company surcharge.
If you would like to explore further how we can help your business please contact us. Or give Deirdre a call on 051 396703 and she will arrange a meeting. Don’t take too long or we’ll all be like the skeleton! As always seek professional advice before deciding what is best for you.