In our last blog, we looked at the new Employee Wage Subsidy Scheme [EWSS]. We gave some information about this around eligibility, rates, and what to do. For more detail Read here
This week we are going to focus on important information you should know when setting up a company. This is Part 1 so 5 this week and 5 next week. The aim is to arm you with the basics so that you know what you are getting into. We hope it will also help you decide if a company is right for you.
Cost of Set-up
Our typical charge is €850 plus Vat. Included in this is the company formation agent fee of €250. We use a well-established formation agent in Carlow called CLS. For more information on them click here . What do you get for this?
- Initial consultation to give you the information you need about shareholdings and officers. This is important as it can have beneficial tax consequences down the line
- Completing the paperwork to set up the company
- Searching the availability of a company name
- Liaising with you to get all original signatures in the right place
- Speed – we get this done as fast as possible. Usually, it takes a week.
- Registering the company for all taxes. This will be Corporation Tax and could also include VAT & PAYE.
- Registering the company with the Central Register of Beneficial Ownership
This is an all-in service and covers everything you need to make sure you get it right from the start.
Taxes in the Company
The rate of tax the company pays depends on what types of income or gains the company has. The rates are as follows
12.5% – trading profits
25% – investment income such as deposit interest, rental income, and dividends. Dividends can be at the lower 12.5% rate in some cases
33% – Capital gains in a company
If your company is a close company then you need to be aware of the main tax rules for close companies. The vast majority of companies in Ireland are close companies. These are companies that are under the ownership and control of 5 or fewer people. For close companies that carry out professional services, there is a surcharge. This increases the tax rate on the trading profits to about 19%. For more information about what is a professional service company click here
If your company has investment income there is also a surcharge on that in some cases. The surcharge is to encourage shareholders to take profits or investment income out. They can take this through salary or dividends. The surcharge on investment income, not taken out of the company by shareholders is 20%. This increases the rate on this income at close to 40%. Read here for further info on this
Taking Money out of the company
Remember the company is a separate legal entity to you with a bank account in the company name. This is not your money but your company’s money. The only ways to take money out from the company are through
- salary
- dividends
- expenses
- loan repayments
If you take a salary or dividends from the company these will be subject to tax. The tax you pay on your salary will depend on the level of salary you take, and the tax credits you have. You will have flexibility here as you can set your salary level based on what you need and what you can afford to pay. You can maximise lower rate bands and credits to minimise the tax cost. You may need a higher salary as you need more money to fund your personal outgoings. Click here for info on tax bands and credits.
You can take dividends from your company if you need extra money. This can also help reduce close company surcharges. The directors of the company would declare a dividend per share. For example, Third Agri Minister Ltd had 2 shareholders Barry and Dara who had 50 shares each. They declared a dividend of €100 per share for the year ended 31 December 2019 as the company had traded well.
| Gross Dividend | 100 shares x €100 | €10,000 |
| Dividend Withholding Tax | 25% | €2,500 |
| Net Dividend | €7,500 | |
| Net Barry | €3,750 | |
| Net Dara | €3,750 |
Barry and Dara will pay tax on the gross dividend of €5,000 each in their tax return and will get a credit for the DWT of €1,250.
As an employee/director of a company, you can claim expenses for genuine business expenses you incur. The most common expenses are for travel and subsistence. The main rule is that if you are travelling from your ‘normal place of work’ to a business meeting you can claim. The expense claim here could be travel where you claim a set rate per kilometre travelled. It could also be for subsistence which is a lunch or dinner rate. What rate you get depends on the time you are away from your normal place of work. Click here for more information
On setting up the company you may have given money to it as initial working capital. If you gave the company €5,000 to meet initial costs, then that money is yours and you can take it back when funds are there. There are no taxes on taking this money back. Also, you could put assets into the company such as stock, debtors, goodwill, and motor vehicles. These assets would have a value and that value is money that you can take out of the company tax-free
Company pays some of your costs
The company can pay some of the costs that you pay now. This can mean that your net salary from the company will go further. Examples of this would include:
- Pension contributions
- Medical Insurance premiums
- Income Protection
- Company Car
- One-off annual voucher
- Bike to work scheme
- Home broadband and telephone line rental for business use
Some of the items listed above are benefits which means that you are liable to benefit in kind [BIK] on the benefit. This is extra income on which you pay tax. Other benefits like the annual voucher, bike to work, and company pensions are tax-free. If the company purchases an electric car for less than €50,000 there is no BIK, so the company pays all the costs of that.
If your company is paying for your car, your bike, your pension, and your broadband you will keep more of your salary. That can be more money for holidays, savings, or an educational fund for your children.
Company Pension
Apart from your home one of the largest assets you can have is a pension. This is an important concern for a lot of people. The current state pension is €13,000 per annum. It is very good, but you are not going to have a wild retirement on it. Some people love and understand pensions very well. Others don’t like them and there can be an air of mistrust around those that give advice in this area.
We would recommend those that have a company to set-up a company pension for the owners. You are using company money to create a personal asset for you and only the company has to contribute. You don’t have to pay anything from your own salary. The amount can fund a pension for you up to two-thirds of your final salary. As you control the salary you take you can increase your salary as you get closer to retirement. This would allow the company to contribute more funding. Let’s look at an example
Holly is the main shareholder of Ben & Holly Ltd. Holly’s aim is to have a pension fund of €800,000 when she gets to retirement. The company contributes €2,000 per month for 25 years to achieve that target. Holly is on a salary of €60,000. If Holly is a sole-trader and in her 30’s she could contribute 20% of her salary and get tax relief. That is €12,000 per annum. When Holly is in her 40’s she can contribute 25%, which is €15,000 per annum. This is coming from her net salary. In a company situation, she keeps all her salary and the company contributes. What way does she access an €800,000 pension fund?
| 25% | Tax-free lump sum | €200,000 |
| AMRF | €63,500 | |
| ARF | €536,500 |
The ARF and AMRF are your assets and you can draw down the income from both and capital from the ARF. Any money taken from these is liable to tax. From the ARF the annual drawdown is 4% or 5% depending on your age. If Holly took 5% of the ARF above that is €26,825 of income. If you add the state pension to that, her retirement income is close to €40,000. She could only pay tax on that income at 20% before tax credits. Read here to see our blog on company pensions as part of exit planning.
If you want help to set-up a company the right way or need advice if you already have a company contact us. Or give Deirdre a call on 051396703 and she will point you in the right direction
