One of the most pressing challenges that business owners are presented with today is the act of “double hatting”. You’ll wear two “hats” when you run a company: your “personal hat” and your “work hat”.

Everyone who works full-time does this to an extent, but as a business leader you have additional responsibilities on your shoulders – and one of these responsibilities is managing two “pots” of wealth.

Your company’s finances are of vital importance, of course, but it’s crucial not to place your personal wealth on the back burner either.

Indeed, a common mistake many business owners make is to somewhat ignore their personal financial situation. They might instead rely on the fact that the business will provide an injection of capital upon a sale. While this may be the case, extracting wealth from your business throughout its lifespan could increase your financial security.

So, here are five ways to extract wealth from your business, and how each one could affect your personal financial circumstances.

1. Pay yourself a salary

While some business owners shy away from paying themselves a salary, especially in the early years, doing so is both a tax-efficient and sensible way to maintain a healthy level of personal wealth.

Of course, taking a salary as a business owner doesn’t exempt you from tax: your income is likely to be subject to Pay as You Earn (PAYE), Pay-Related Social Insurance (PRSI), and Universal Social Charge (USC).

Nevertheless, receiving a salary from your business may allow you to:

• Make pension lodgements (more on this in the next section)
• Reduce your personal debt
• Pay for essentials, including your mortgage, school fees for children, and other regular expenditure
• Gain the peace of mind that your personal financial stability doesn’t entirely depend on a successful company sale later.

Building a pot of personal wealth that isn’t tied up with your company’s finances could allow you to separate the two in your mind, as well as on paper. This could help to reduce stress and allow you some financial independence.

2. Make pension contributions

According to a study by the Pension Support Line, conducted in 2022 and published by Kota, the average pension savings of an Irish employee at retirement stands at €104,000.

This will not come close to supporting the lifestyle of business owners and their families in retirement. While you may also receive funds from selling your company, the amount received, and the timing of the sale, are not guaranteed.

With this in mind, it is vital to think seriously about making pension lodgements throughout your career.

As a business owner, you can pay up to €2 million into a pension tax-efficiently over the course of your lifetime, leaving plenty of scope to build up a substantial pot of wealth for your family to benefit from later in life.

Pensions are one of the most tax efficient ways to build personal wealth for you and your family and should be an integral part of most good financial plans.

3. Take dividends

Dividend payments are another tax-efficient way to extract wealth from your business over the years.

Paying yourself dividends as part of your remuneration could also reduce the amount of income you take that is subject to PAYE, PRSI and USC. This said, dividends are liable for Dividend Withholding Tax, which cannot be offset against Corporation Tax.

4. Put appropriate personal expenses through your company

Although it’s important that these transactions are made for business purposes, you can purchase personal items, like a car, using company finances. For example, if you visit clients often, having a suitable vehicle is a necessity, so you can file this as a company expense.

By expensing certain personal items like a car and work clothing, you may reduce taxable profits while simultaneously decreasing your personal outgoings.

Remember, personal assets that are used for business purposes are subject to Benefit in Kind (BIK) tax.

5. Sell your business

For many business owners, building a successful company over the course of your career is a natural prelude to selling up when you decide to retire.

This said, retirement doesn’t have to be the only time you could consider selling your business – you may wish to undertake another corporate venture, or could simply receive an offer that is too good to pass up.

In any case, a sale is a highly lucrative way to extract total value from your business in one fell swoop.

As we discuss in our in-depth insights, preparing for a sale around five years in advance could help you time this event in line with your personal circumstances, and allow ample opportunity to find an appropriate buyer.

Although selling your business is likely to benefit your personal finances hugely, it could be unwise to rely on the idea of a potential future sale entirely. So, if you do plan to sell your company soon, this doesn’t mean that the above four points don’t apply to you.

What’s more, it may help to speak with a tax adviser and financial planner to discuss how a sudden influx of capital from a sale could affect your personal tax bill.

Handling this large transaction on a personal level can be daunting, but a financial planner can help you make the most of these funds in the years to come.

Get in touch to find out how financial planning can help business owners maximise their personal finances

We specialise in working with business owners who wish to grow their personal finances alongside their corporate wealth.

To find out more about how we can help you, email us at clients@iqf.ie, or call 353 71 915 5560.

Please note

This article is for information only. It does not constitute advice.

It describes financial planning services that iQ Financial can offer to you. Financial planning services are not regulated by the Central Bank of Ireland.

iQ Financial is not a tax adviser and tax advisory services are not regulated by the Central Bank of Ireland.