As the financial year draws to a close, it’s vital for small and medium enterprise (SME) owners to review their strategies for extracting profits from their companies. Wealth Extraction, the technique of withdrawing profits for the owner’s advantage in a tax-efficient way, is a key element in achieving financial freedom during retirement. By comprehending the different available methods, business owners can make well-informed choices that improve their financial results.

Maximising Profit Extraction Through Pensions

Investing business profits into a pension is an effective strategy for future planning while obtaining immediate tax advantages. This approach is especially beneficial for SME owners aiming to enhance their retirement savings. By making pension contributions, employers can receive Corporation Tax relief at a rate of 12.5% on these contributions, subject to certain limits. Moreover, these contributions grow tax-free until retirement, offering a valuable opportunity for wealth accumulation.

Employees also gain from these contributions as they are not subject to Income Tax, PRSI, or USC liabilities on the pension contribution. For employers, this form of remuneration is exempt from PRSI liabilities, representing a financially wise option. This strategy also supports planning for a business exit, with options to access pension funds from age 50 under specific conditions, or after 60 without restrictions.

Upon retirement, the pension pot becomes a significant financial asset. A tax-free lump sum is available up to the first €200,000, with higher amounts being taxed at favourable rates. Retirement income can then be obtained through a Pension Annuity or an Approved Retirement Fund, allowing flexibility in fund reception. Furthermore, a pension can act as a means to transfer wealth to your spouse and offspring, thus preserving your financial legacy.

Exploring Your Wealth Extraction Options

SME owners should weigh the tax implications of each profit extraction method. Keeping profits within the company subjects them to Corporation Tax and possible additional surcharges, while drawing profits as a salary might attract high tax rates, consuming a substantial portion of the amount withdrawn.

An alternative is withdrawing profits through an Executive Pension Plan, offering tax relief for the employer and no immediate tax liability for the employee. The beginning of 2023 saw positive changes for Personal Retirement Savings Accounts (PRSAs), with the removal of the Benefit in Kind for employer contributions, enabling unlimited contributions (within a lifetime limit) and immediate tax relief.

Consultation Is Key

Identifying the most efficient wealth extraction method is essential for SMEs. The options discussed are merely a starting point; a detailed consultation with a financial advisor is needed to customize the best approach. FJ Hanly & Associates is dedicated to aiding SME owners in managing the intricacies of tax planning and wealth extraction. We encourage you to connect with our advisors to discover how we can improve your financial planning and optimise your tax benefits.

For an in-depth analysis of your business’s financial strategies, contact an FJ Hanly & Associates Advisor today.