Extracting Wealth From Your Business

Extracting wealth from a business is a subject that frequently exercises the minds of the owners, as they weigh up the pros and cons of the various routes available to them.

While specialist tax advice should always be sought to examine and optimise your specific circumstances, below are some of the most common approaches to extracting wealth from companies.

Careful consideration to each of these routes is important, in order to maximise the outcomes for the business owner. Very often, the optimal result is achieved by a combination of some, or all of the strategies outlined.

Salary

Taking a salary from a business provides business owners with an income during their working life. While the tax code in Ireland is quite penal with a marginal rate as high as 52%, most individuals require a salary to maintain their personal lifestyle. Up until 2023, salaries also played an important role in retirement planning, however this has now lessened significantly, as outlined below.

Employing Family

Employing a spouse and/or children in your business opens up a number of wealth generation opportunities. First of all, each individual has their own income tax reliefs – sharing income between two or more people is more efficient than all of the income going to one individual.

In addition, pension funds and indeed business exit reliefs are individualised, presenting wealth extraction opportunities to multiple family members, when employed in the business.

It is very important that each family member who receives an income from the business is gainfully employed. Having timesheets, job descriptions and proof of the actual work being carried out by each person is critical.

Pensions

Up until 2023, the maximum contributions payable by an employer into a pension plan were defined by the salary and service of the individual. However, as a result of the Finance Act 2022, significant changes were made in relation to Personal Retirement Savings Accounts (PRSAs).

Unlike company pension plans, PRSAs do not define the level of employer contribution allowable with reference to age, service, salary, or other pension benefits. The only factor that limits employer contributions to a PRSA is the lifetime Standard Fund Threshold (SFT) of €2million. This makes PRSAs extremely attractive now for business owners when compared to occupational pension schemes or master trusts, where employer contributions continue to be limited by salary, service and age factors.

Also, tax relief on all employer PRSA contributions can be claimed in the accounting period in which they are paid. This is unlike a special contribution to an occupational pension, where the tax relief must be spread forward over 5 years. Read more here.

Business Exit Reliefs

There are two significant reliefs available to business owners when exiting their business, namely Entrepreneur Relief and Retirement Relief. These reliefs can significantly reduce the level of Capital Gains Tax payable on disposal of a business. More information can be found on these valuable reliefs here.