For business owners and company directors in Ireland, managing a successful company often leads to a unique problem: surplus cash sitting on the balance sheet.
Taking this money out as salary or dividends is incredibly expensive, often resulting in tax rates over 50% when you combine Income Tax, PRSI, and USC. Leaving the money in the company isn’t ideal either, as it may be subject to a close company surcharge, and it exposes your personal wealth to the trading risks of the business.
The solution? An Executive Pension Plan (EPP) or a Master Trust Executive Pension.
The Most Tax-Efficient Way to Extract Wealth
An Executive Pension allows your limited company to make substantial contributions directly into a pension fund in your name. This is, without question, the most tax-efficient way to extract wealth from an Irish company.
Here is why it works so well:
- No Benefit-in-Kind (BIK): Employer contributions to your pension are not treated as BIK. You do not pay Income Tax, PRSI, or USC on the money going in.
- Corporation Tax Relief: The contributions are generally allowable as a business expense, meaning they reduce your company’s Corporation Tax liability.
- Tax-Free Growth: Once the money is inside the pension wrapper, it grows entirely tax-free. There is no Capital Gains Tax (CGT), no DIRT, and no income tax on dividends.
- Ring-Fenced Protection: The money belongs to you, not the company. It is legally separated from the business and protected from creditors if the company were to run into financial difficulty.
How Much Can the Company Contribute?
Unlike personal pension contributions, which are strictly capped at a percentage of your salary based on your age (e.g., 20% in your 30s, 25% in your 40s), employer contributions to an Executive Pension are calculated differently.
The maximum allowable funding is based on your salary, your age, your gender, your marital status, and your years of service to the company. The goal is to fund a pension that provides two-thirds of your final salary at retirement.
Because of this calculation method, a company can often contribute hundreds of thousands of euros into a director’s pension as a single premium, completely legitimately and highly tax-efficiently.
The Timing Matters
If your company’s financial year-end is approaching and you have surplus cash, funding an Executive Pension should be your first priority. It transforms money that would otherwise be heavily taxed into personal, protected wealth.
Our corporate advisors at IFC Finance specialize in extracting wealth for directors. Contact us to calculate exactly how much your company can contribute to your pension this year.