Is your Company’s financial year end on the 31st December?

Business Strategy Meeting

Are you aware that you can maximise your pension whilst minimising your corporation tax bill?

 

If you are a business owner/shareholder and make a contribution to your pension prior to your company’s year-end, this will reduce your assessable profits which in turn reduces your Corporation Tax bill.

 

Every business owner grapples with ways of extracting wealth from their business without incurring tax leakage of up to 52%. The beauty of Funding Your Retirement Account from your business is that it is one of the most tax-efficient way of transferring wealth.

 

A director receiving a salary from a limited company can avail of very attractive levels of pension funding. The necessary contributions can be made by an employer to fund your account which in turn can provide a pension of 2/3rds of your final pensionable salary.

 

The following chart shows the maximum contributions an employer could make and get full tax relief on these payments.  The chart presumes you have no existing pension provision and will have 10 years pensionable service with the company at normal retirement age (60).

 

The chart below assumes the employee is married.

Age when contributions commenced Maximum annual contributions as % of salary
40 108%
45 144%
50 216%

 Thus, as evidenced by the above chart, the amount of money that a Company can contribute to a pension scheme on behalf of its director(s), employee(s), and claim tax relief on, is enormous.

Case Study

Michael is a 40 year old proprietary director.

The Company has €250,000 in its accounts that it wishes to dissipate.

Option 1 Option 2
Pay the €250,000 as salary over 5 years Company effects an EPP (employee pension plan) and pays €250,000 single contribution
Additional salary               €250,000

Less tax @ 40%                  €127,500 (Note 1)

+ PRSI /USC @11%

 

 

 

 

 

Net Figure                           €122,500

 

 

Total fund @ age 60        €800,000 (Note 2)

Tax free cash @ 25%       €200,000

                                           €600,000

Less tax @ 40% +

PRSI/USC @ 8%              €288,000 (Note 3)

Net Figure                          €312,000

Plus Tax Free Cash           €200,000

 

Combined Net Figure   €512,000

In addition, the Company is allowed write-off pension contributions against Corporation Tax, which we will assume to be at 12.5% (Note 4).  Thus, the net cost to the Company of contributing €250,000 on Michael’s behalf, is only €218,750, representing a tax saving of €31,250.  When this saving is combined with the €512,000 net fund Michael received, the tax advantages are obvious.

Note 1 – PRSI implications for the company have been ignored

Note 2 – Assumes a net growth rate of 6% and an investment term of 20 years

Note 3 – Assumes no necessity to invest €63,500 in an AMRF

Note 4 – Based on the Government’s objective to have a rate of 12.5% Corporation Tax.

 

Furthermore, while it is in the trust, your money grows tax-free. You can invest it in a myriad of different ways, reflecting your attitude to risk. No DIRT or exit taxes are deducted.

 

By taking Money out of a company by way of Pension Contribution the individual is getting the benefits of an “asset” with pre-tax money.

 

For more information about Pension Contributions and maximising your tax reliefs call us on 091 778677 or email advice@olg.ie .

 

 

The amounts quoted herein are subject to Revenue rules, requirements and restrictions. This article is for information purposes only and should not be used or interpreted as financial advice. You should always obtain your own impartial financial, tax & legal advice based on your own particular circumstances before entering into any financial contract.

 

Warning: These figures are estimates only. They are not a reliable guide to the future performance of this investment.

 

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