Cash in Your Company

Plan for success

Cash in Your Company – What to do with it?

Have you cash in your company? Do you know what to do with it? What do the directors do with it and how do they make it work for them?

The main points we will focus on are

 

  • Salary/Dividends
  • Benefits
  • Pension
  • Invest
  • Cash extraction

 

Juan Cornertoe and Al Frappucino own American Pi Ltd, an engineering consultancy business. They own it 50:50. Both are in their 40’s and have mortgages on their own homes. Business is going well for them, generating €250000+ of profit each year after salaries. The company bank balance is healthy with €500000 in it.

A meeting is set for next Thursday to discuss what options they have.

 

Salary/Dividends


With excess cash in your company do you take this out through salary or dividends? You can take money out and the usual way is through salary or dividends. Our preference is salary as the company gets a tax deduction for that. To include the professional service surcharge, the effective company tax rate is 20%. Payroll taxes on salary will be 50% but with a 20% deduction the net rate will be 30%

Say Juan takes a bonus of €50000 the taxes are

PAYE €25000
Less Corporation Tax Deduction €10000
Net Tax cost €15000

Juan has €25000 left, and he uses that to pay down his mortgage. He has €100000 left on it, and he wants to clear that over the next 3 years.

Dividends come out of after-tax profits. The company doesn’t get a tax deduction for the payment. Al takes a dividend of €50000.

 

Gross Dividend €50000
Dividend Withholding Tax [DWT] €12500
Net dividend for Al €37500

 

 

But Al will pay taxes on the dividend

 

Gross Dividend €50000
Tax due €25000
Less Credit for DWT €12500
Extra Tax due €12500

 

So, the net position is the same at €25000. Al gets a net dividend of €37500 and must pay a further €12500 Income Tax.

 

Once a bonus is paid within 6 months of the year end it can backdate into the previous accounting period. For December year ends that will be by the end of the following June.

 

Both have €10000 owing to them from their director’s current accounts. They can take this money out tax free.

Benefits


The company doesn’t pay for their medical insurance, but it will do going forward. They will pay BIK on this but will save them making the payments from their net salaries. They can also claim the tax credit of up to €200 per adult and €100 per child if the company pays for their spouses and kids. Al’s policy will cover his wife, Betty and two young Frappucinos.

Both drive their own cars, and a company car is not high on the list of priorities. From a BIK perspective an electric car makes the most sense. For 2023 the original market value reduces by €35000. For 2024 and 2025 the reduction is €20000 and €10000. Say the company gets Al an all-electric car in early January 2023. It cost €45000 so the BIK would be

Original market value €45000
Less 2023 reduction €35000
Net Value €10000
Category A vehicle – 22.5% €2250
Tax payable 52% €1170
Tax payable monthly €98

There are other smaller benefits. The provision of high-speed internet and mobile and home telephone isn’t liable to BIK. This is on the basis that it is for business use and private use is incidental.

Both decide to take a voucher from the company for €1000. This is tax free provided it meets the conditions of up to two vouchers in a year. Plus, the combined total value cannot exceed €1000.

 

Pension


Juan and Al are in a company pension scheme and the company pays €20000 each year for both. Their salaries are €70000. The company can make contributions to fund up to two thirds of their final salaries, being €46667. Assuming an annuity rate of 5% this would be a fund of €933340. Not an insignificant sum.

The gentlemen increase their salaries to €100000. Now they can fund up to two thirds of that amount. That would be an estimated pension pot of €1333340. Tax relief will be available on the company pension payments provided

 

  • they are within Revenue approved limits and
  • they are ordinary annual contributions

 

If the company makes special lump sum contributions it will get tax relief on those, but it could be over a few years.

Let’s Marty McFly to the future and say it is 2040. Juan’s pension pot is €1000000, and he draws this down. He can take it as follows

25% as a lump sum €250000
Tax free amount €200000
Taxable amount €50000
Tax payable 20% €10000
Net lump sum after tax €240000

The balance of the pension can either go into an ARF or buy a pension. Juan puts €750000 into an ARF and gets an income of 4% per annum of €30000. He can take more, and this income is, of course, subject to tax.

Invest


Investment can take many forms but would include

 

  • Continuously investing in people, processes, and systems to grow the business more
  • Invest in other assets like shares, property, or investment bonds
  • Buy another business or a share in another business
  • Set up a group structure with a holding company on top of American Pi Ltd. Transfer funds up to the Holdco for investment
  • Invest in the finance function

 

Investment income like rents or dividends is liable to corporation tax at 25%. Al and Juan must be mindful of the impact on Capital Gains relief of any non-trading investments they make.

Cash Extraction


You can use the cash in your company as part of an exit strategy. The shareholders can extract cash from the business if they want to get out. They do this through a share buyback.

Juan is 5 years older than Al and he wants to exit at 60. They do a valuation of the company, and the value of Al’s shares is €900000. The company uses some of the cash it has built up to redeem Juan’s shares and they pay him €900000.

When a company pays a director for its shares the payment is usually subject to Income Tax. But, if the payment benefits the trade, it can be subject to Capital Gains Tax. This is where CGT reliefs like Retirement Relief or Entrepreneurs Relief become relevant.

On the basis that he can get 100% retirement relief his tax liability is

Sales Proceeds €900000
Retirement Relief threshold €750000
Excess over threshold €150000
Tax is 50% of the excess €75000
Net for Juan €825000

 

Summary


Some of the above options will be relevant to you and your company. The main objective is to understand what your personal financial priorities are. For Juan it was to clear his mortgage in 3 years. If you had one financial priority, what would it be? And how could your company help you achieve that objective?

 

Have a plan. Like Hannibal from the A-Team, you’ll love it when a plan comes together.

 

Need help with getting a plan in place for your company and you? If so, Start Here

 

 

 

 

 

 

 

 

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