If you are a director and shareholder of your own company, how you take money out of the business can significantly affect your overall tax position.

One question we regularly hear from company directors is whether they should pay themselves a salary, take dividends, or use a combination of both.

There is no universal answer. The most appropriate approach depends on the company’s profitability, your personal financial circumstances, and how much money you need to withdraw from the business.

Understanding the differences between salary and dividends is an important part of effective tax planning.

What is the difference between salary and dividends?

A salary is a payment you receive as an employee or director of the company. The company processes it through its payroll system, with PAYE, USC, and PRSI deductions applied as appropriate.

From the company’s perspective, salary and associated employer costs are generally deductible expenses when calculating taxable trading profits, provided the payments meet the relevant requirements.

Dividends are different. They represent a distribution of company profits to shareholders and are not an allowable deduction when calculating corporation tax.

Dividends can only be paid where the company has sufficient distributable profits and the appropriate legal and administrative requirements have been met.

In Ireland, dividends are generally subject to Dividend Withholding Tax (DWT) at the applicable rate. You must also declare them on your personal tax return, and they may be subject to additional income tax, USC, and PRSI, depending on your circumstances.

Therefore, don’t assume dividends are automatically a more tax-efficient way to take money out of your company.

The advantages of taking a salary

A regular salary provides a predictable income and can make personal financial planning easier.

It also creates a formal employment record and may contribute towards your social insurance record, subject to the applicable PRSI rules.

For the company, salary payments can reduce taxable trading profits, potentially reducing the corporation tax payable.

However, salary payments bring payroll obligations, including correctly calculating and reporting deductions and employer PRSI where applicable.

The amount you pay yourself should also be commercially reasonable and appropriate to the work you undertake for the company.

What about dividends?

Dividends offer another way for shareholders to receive value from their investment in the company.

Unlike salary, dividends are paid from profits after corporation tax. They are not subject to employer PRSI in the same way as salary payments, although personal tax and PRSI considerations can still arise.

They can offer flexibility because they do not necessarily need to be paid at the same frequency or in the same amounts as salary.

However, dividends cannot simply be used as a substitute for salary without considering the relevant company law and tax requirements.

They must be properly authorised, supported by sufficient distributable profits and recorded correctly in the company’s accounts.

Is a combination the best approach?

For many owner-managed companies, a combination of salary and dividends may be worth considering.

A director might receive a regular salary to provide a consistent personal income, with additional dividends paid when the company’s financial position allows.

The challenge is finding the right balance.

For example, paying a higher salary may reduce the company’s corporation tax bill but increase the director’s personal tax and PRSI liabilities. Taking more dividends may reduce certain employment-related costs but could result in a less favourable overall tax position depending on the individual’s circumstances.

Other factors may also influence the decision, including pension contributions, available tax credits, other sources of income and the company’s cash flow requirements.

It is also worth remembering that money held within a company is not automatically available for personal spending. Taking funds out incorrectly can create tax and accounting complications.

Don’t leave tax planning until the last minute

The end of the financial year is a useful opportunity to review how you have been remunerated and whether your current arrangements remain appropriate.

If your company has experienced increased profits, your personal circumstances have changed or you are planning a significant withdrawal, it may be worth reviewing your salary and dividend strategy before making decisions.

The most tax-efficient approach should always be considered in the context of your wider financial position, rather than in isolation.

How can HJK help?

At Hyland Johnson Keane, we work with company directors and business owners to help them make informed decisions about remuneration and tax planning.

We can review your company’s financial position, assess the implications of different payment options and help you establish a remuneration strategy that works for both you and your business.

There is no one-size-fits-all solution. A little forward planning can make a meaningful difference to your overall tax position while keeping your company financially healthy.

If you are unsure whether you are taking money out of your business in the most appropriate way, contact the HJK team. We would be happy to help you review your options.