Making the most of strong farm incomes – the cash vs debt decisions

Understanding the tax side of things 

There is a myth that farmers need borrowings to keep down your tax liability, when the reality is that it is actually cheaper to pay Revenue a smaller percentage in tax, rather than pay one hundred per cent to the bank. The tax system actually works in your favour when you pay down debt instead of keeping cash in deposits. Here's why: when you have a farm loan, the interest you pay can be claimed as a business expense, which reduces your tax bill. If you're paying 48% tax, a 6% loan effectively only costs you 3.12% after the tax relief (or 5.25% at 12.5% corporation tax rate). On the flip side, any interest you earn on deposits gets taxed immediately at 33% (DIRT), and you can't offset this against other income. So, you're getting a lower return that's then reduced further by tax. This creates a double advantage for paying down debt: you save more money and get better tax treatment. 

But don't forget you still need some cash 

While paying down debt makes financial sense, farms need cash to operate smoothly. You shouldn't put every penny towards loans because farming has ups and downs throughout the year. It's wise to keep enough cash to cover 3-6 months of your regular expenses. This gives you a safety net for seasonal cash flow gaps, unexpected repairs, or opportunities like buying equipment at a good price or land purchase and providing security during periods of price volatility or production challenges. The sweet spot is keeping what you need for peace of mind and day-to-day operations, then using the rest to reduce debt. 

A practical approach 

You don't have to choose all-or-nothing. Many successful farmers take a balanced approach: keep a comfortable cash buffer, then put most surplus cash towards debt reduction while keeping some aside for opportunities. For example, you might use 70% of your surplus cash to pay down loans while keeping 30% available for unexpected needs or good deals that come up. 

Make your money work harder 

With current interest rates, paying down debt is simply a better use of surplus cash for most farms. The combination of high loan rates (5.0 -7.5%), low deposit rates (around 1.75% or less), and tax advantages makes this a clear choice from a financial standpoint. However, good farm management isn't just about the numbers—it's about balancing financial sense with practical needs. The smart approach is to keep enough cash for comfort and operations, then use the rest to reduce debt during these good income years. 

Irish dairy farmers are in a strong position right now, and this creates an opportunity to make farms more resilient for whatever comes next. The numbers clearly show that debt reduction is the way to maximise that opportunity, but it needs to be done thoughtfully with your specific situation in mind. Remember, these strong income periods don't last forever, so making the most of them now—by reducing debt while maintaining adequate cash reserves—sets your farm up for long-term success.