How to reduce Income Tax for company directors

Reducing income tax for company directors involves strategic planning ahead of tax filing time and utilising various tax reliefs and allowances available under Irish tax law. As the income tax filing deadline is Thursday 14th November for online ROS filers, now may be a good time to review your tax bill.

Here are a few effective tax saving strategies:

1.?Maximise Pension Contributions

Company directors can make significant pension contributions, which are tax-deductible for both the company and director. This reduces the company's taxable profits and provides a tax-efficient way to save for retirement.

• Employer Contributions: There is no legislative limit on the amount an employer can contribute to an employee’s PRSA (Personal Retirement Savings Account). This means that a company director can potentially receive significant pension contributions made by their company, provided it is within the overall pension fund limits.
• Lifetime Fund Limit: The total tax-relieved pension fund per person is capped at €2 million over a lifetime. (This will increase to €2.8 million from years 2026 – 2029.) This includes all pension benefits from all sources taken since 7 December 2005. If the value of the pension fund exceeds €2 million, the excess is subject to a deemed distribution and income tax on the excess amount.
• Annual Tax Free Contributions: Employee Tax relief on annual contributions is capped at age-related percentages of earnings, with an earnings cap of €115,000. Contributions are not subject to income tax, PRSI, or USC

Annual Pension Contribution Limits

• Age-Related Percentage Limits: The amount of pension contributions that can be claimed for tax relief is based on the director's age and net relevant earnings, subject to an earnings cap of €115,000. The age-related percentage limits are as follows: Under 30 years old: 15% 30-39 years old: 20% 40-49 years old: 25% 50-54 years old: 30% 55-59 years old: 35% 60 years old or over: 40%

2.?Utilise Tax-Free Benefits

Directors can receive certain benefits that are not subject to income tax, such as:

• Health Insurance: Paid by the company
• Company Car: If structured correctly, the benefit-in-kind (BIK) can be minimized
• Mobile Phone and Internet: Provided for business use
• Small Gifts Voucher: Under the Small Benefits Exemption scheme, employers can provide employees with a non-cash benefit of €1,000 per annum, without the benefit being subject to tax, provided certain conditions are met. This increases to €1,500 per annum from 1 January 2025.

3.?Claim All Available Deductions

Ensure that all allowable expenses are claimed, including:

• Business Travel and Subsistence: Tax Free Expenses incurred wholly and exclusively for business purposes at generous rates, paid for travel, accommodation and food purchased when away from the office on business
• Professional Subscriptions: Membership fees for professional bodies
• Home Office Expenses or Remote working: A portion of home utility bills if working from home or daily remote working tax free allowance

4.?Dividend Payments

Dividends are taxed at a lower rate compared to salary. While dividends are paid out of after-tax profits, they are not subject to PRSI or USC.

• Income Tax on Dividends: Up to 40%
• No PRSI or USC

5.?Director's Loan Account

Directors can lend money to the company and withdraw it tax-free as a loan repayment. However, this must be structured correctly to avoid tax implications.

• No Tax on Repayment: If structured correctly
• Interest on Loan: Can be charged at a commercial rate

6.?Use of Capital Allowances

Claim capital allowances on qualifying business assets, such as machinery, equipment, and vehicles. This reduces the company's taxable profits.

• Annual Allowance: Up to 12.5% of the cost of the asset
• Accelerated Capital Allowances: For energy-efficient equipment

7.?Purchase a commercial property through your company

• Rental Income: If the property is rented out, the rental income will be subject to corporation tax at the rate of 25%, not higher rate income tax.
• Trading Income: If the property is used for trading purposes, the income generated from the business activities will be subject to the standard corporation tax rate of 12.5%.
• Tax Efficiency: Purchasing the property through a company can be more tax-efficient in terms of debt repayment. For example, a company paying 12.5% corporation tax needs to earn less gross income to repay the same amount of debt compared to an individual paying a higher income tax rate.

8.?Purchase a commercial property in your own name and rent it to your company

• Company: Can deduct the rent paid as a business expense, reducing its taxable income.
• Individual: Must declare the rental income and can deduct allowable expenses to reduce the taxable amount, but can take a deduction for mortgage interest, rates and other expenses

e.g. If you charge your company €12,000 per year in rent and pay €10,000 per year in interest on a loan used to buy the property, you will pay income tax on the net rental income of €2,000 (€12,000 - €10,000).

9.? Employ an adult family member to work in the company

• Employing family members can be a tax-efficient strategy to reduce company tax. The employment must be genuine, the remuneration reasonable, and proper records are maintained.
• The wages paid can be deducted as a business expense, reducing the taxable income of the business

10. Share Schemes

Participate in approved share schemes, such as the Employee Share Ownership Trust (ESOT) or the Save As You Earn (SAYE) scheme. These schemes offer tax advantages.

• Tax-Free Gains: On shares acquired under approved schemes
• Deferred Tax Liability: On share options

11.?Entrepreneur Relief

If you sell shares in your company, you may qualify for Entrepreneur Relief, which reduces the Capital Gains Tax (CGT) rate to 10% on gains up to €1 million.

• Reduced CGT Rate: 10%
• Lifetime Limit: €1 million

12.?Retirement Relief

If you are over 55 and sell your business, you may qualify for Retirement Relief, which can significantly reduce or eliminate CGT on the sale.

• Tax-Free Amount: Up to €750,000 if under 66, or €500,000 if over 66
• Conditions: Must have owned and worked in the business for at least 10 years

13.?Share Buybacks

Your company can buy back its shares from you, which can be treated as a capital transaction rather than income. This payment to you can be tax-efficient because it can be combined with other tax reliefs such as retirement relief or entrepreneur relief.

• Capital Gains Tax: 33%
• Retirement Relief: Up to €750,000 tax-free if conditions are met
• Entrepreneur Relief: Reduced CGT rate of 10% on gains up to €1 million

14.?Winding Up the Company

If you decide to wind up the company, the distribution of assets can be treated as a capital transaction, subject to CGT rather than income tax, with tax free reliefs available.

• Capital Gains Tax: 33%
• Retirement Relief and Entrepreneur Relief: Can apply to reduce the tax liability

15.?Tax-Efficient Investments

Invest in tax-efficient schemes such as the Employment and Investment Incentive Scheme (EIIS), which offers tax relief on investments in qualifying companies.

• Tax Relief: Up to 40% of the investment amount
• Holding Period: Minimum of 4 years

16 ?Rent-a-Room Relief & Rent Tax Credit

Renting out a room in your home can provide tax-free rental income.

• Tax-Free Income: Up to €14,000 per year.
• Rent Tax Credit: A tax credit of €1,000 for jointly assessed couples or €500 for single persons is allowed to offset against your tax liability from years 2022

17.?Medical Expenses

Claiming tax relief on qualifying medical expenses paid by you, for yourself or family or dependant relative can reduce taxable income.

• Tax Relief: At the standard rate of 20%.
• Dependent Relative Tax Credit: Available for maintaining a dependent relative.
• Home Carer Tax Credit: Available for married couples or civil partners where one stays at home to care for a dependent person.
• Relief on the Cost of Employing a Carer: Available for the cost of employing a carer for an incapacitated family member.

18.?Home Renovation Incentive (HRI)

Tax relief on qualifying home renovation work.

• Tax Credit: Up to 13.5% of the cost of renovations.

Part 2: Tax efficient Financial Products

By incorporating ?insurance products into your financial planning, you can effectively reduce your income tax liabilities while also providing valuable protection. Financial planners can recommend a variety of products and strategies to help reduce income tax liabilities. By leveraging these financial products individuals can effectively reduce their income tax liabilities. It is advisable to consult with a financial planner or tax advisor to tailor these strategies to your specific circumstances and ensure compliance with all relevant tax laws and regulations.

Here are some key products and strategies that can be particularly effective:

1.?Pension-Linked Life Assurance

• Tax Relief on Premiums: Premiums paid for life assurance policies linked to a pension plan can qualify for tax relief. This is because they are considered part of the overall pension contribution.
• Benefit on Death: Provides a lump sum to beneficiaries, which can be tax-efficient.

2.?Income Protection Insurance

• Tax-Deductible Premiums: Premiums paid for income protection insurance are tax-deductible, reducing your taxable income.
• Replacement Income: Provides a replacement income if you are unable to work due to illness or injury, which is taxable but can be structured to minimize tax impact.

3.?Mortgage Protection Insurance

• Allowable Deduction: Premiums paid for mortgage protection insurance can be treated as an allowable deduction in computing rental income for income and corporation tax purposes. This applies specifically to mortgage protection policies aimed at covering the outstanding mortgage amount in the event of death.

4.?Section 72 Life Assurance Policies

• Exempt from CAT: Proceeds from a Section 72 life assurance policy are exempt from Capital Acquisitions Tax (CAT) when used to pay CAT liabilities. This can be particularly useful for estate planning.
• Tax Relief on Premiums: Premiums paid for these policies can qualify for tax relief, reducing your taxable income.

5.?Medical Insurance

• Tax Credit: You can claim a tax credit for medical insurance premiums paid. The credit is given at the standard rate of tax (20%) and is applied at source by the insurer.
• Age-Related Tax Credit: Additional tax credits may be available depending on your age.

6.?Permanent Health Insurance (PHI)

• Tax-Deductible Premiums: Premiums for PHI policies, which provide long-term income replacement in the event of illness or disability, are tax-deductible.
• Taxable Benefits: Benefits received are taxable, but the structure can be managed to minimize tax impact.

7.?Keyman Insurance

• Tax-Deductible Premiums: Premiums for keyman insurance, which protects a business against the financial loss resulting from the death or disability of a key employee, can be tax-deductible.
• Business Protection: Provides a lump sum to the business, which can be used to cover expenses or find a replacement.

Conclusion

Reducing income tax for company directors requires a combination of strategic planning and taking advantage of available tax reliefs and allowances. By implementing these strategies, directors can effectively minimize their tax liabilities and maximize their personal wealth. For personalized advice and detailed planning, consulting with a tax advisor and financial planner is highly recommended.

For more detailed information and personalised advice, feel free to contact us at MKConsultancy.ie or TaxTalk.ie. We are here to help you make the most of your company's profits while minimising your tax liabilities.

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October 2024