At John P Burke we know for many company directors, deciding how to structure pay is not straightforward. Unlike employees who receive a fixed salary, directors often have the flexibility to balance income between salary, dividends, and pensions. Each option carries different tax implications, and the right mix can make a significant difference to both personal wealth and the financial health of the business.

Salary
A director’s salary is treated as employment income, subject to PAYE, PRSI, and USC. One of the advantages of drawing a salary is that it ensures access to social welfare benefits such as state pension entitlements and contributes towards qualifying for a mortgage. On the other hand, salaries are taxed at marginal income tax rates, which can be costly at higher levels. Setting a reasonable salary that reflects the work undertaken often forms the foundation of a pay strategy.

Dividends
Dividends allow directors to take profits out of the business once corporation tax has been paid. They are not subject to PRSI but do attract income tax and USC. The key advantage is flexibility, as dividends can be paid when cash flow allows. However, dividends are not deductible for corporation tax purposes, so the company cannot reduce its taxable profits by paying them. Directors need to balance the tax cost with the benefit of accessing business profits in a more flexible way.

Pensions
Contributing to a pension is one of the most tax-efficient methods of planning for the future. Employer pension contributions are deductible for corporation tax, reducing the company’s liability. At the same time, pension contributions are not treated as a taxable benefit for the director. This means that money can be set aside for retirement while lowering the overall tax burden. The main limitation is accessibility, as funds remain locked away until retirement age.

Finding the right balance
No single approach suits every director. Factors such as personal income needs, the company’s profitability, and long-term retirement plans should all be taken into account. A balanced strategy often involves drawing a modest salary to maintain social benefits, supplementing it with dividends where appropriate, and directing surplus funds into pensions for long-term security.

Checklist for directors

• Review current and future income needs
• Set a reasonable salary for work undertaken
• Use dividends carefully to access profits
• Maximise pension contributions for tax efficiency
• Seek professional advice to tailor the right mix

Thoughtful pay planning ensures that directors optimise their income while keeping both personal and corporate taxes under control. It also provides a structured path towards financial security in the years ahead.

If you would like to discuss your business needs. Call John P. Burke & Co on (01)6217410 or email info@johnpburke.ie

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