The move from Sole Trader to Limited Company can be painful in the earlier years. Some business owners find it hard to see the value of the move. While the initial 12 to 18 months can be tough, we see huge advantages in making this move. Why? Well, we have been through this in our business and experienced the initial pain. And after that the benefits of being in a company.
The relief that we have banished that November pain and have more money in the company to grow and progress. Or as the lyric from My Silver Linings goes “to keep on keeping on”
Before you move from a sole trader to a limited company it’s important to understand the numbers. Does it make financial sense for you? The best way for me to help you is to delve into a case study. So, I’ll introduce you to Prince Murphy and his business. The main points we’ll go through are
- Sole trader
- Limited Company
- Income Tax Tidy up
- Summary
Sole Trader
Prince Murphy is a sole trader and runs a fresh fruit and veg business in Waterford City. He lives out the road with his uncle & aunty in a house in Belair. His dad Billy loved Prince the singer back in the 80’s and 90’s and called the young lad after his hero. A sign of the times Billy always said! Young Prince took over the business from his Uncle Milo in 2018 and is doing well. Too well, according to Prince as the profits are strong but the tax liabilities are a killer.
Every October Prince goes to his accountants O’Neill, O’Neill, O’Neill & Sons to hear the bad news. He walks into the office like he’s going to a wake. He has come to say goodbye to all his money in the coffin. To pay his last respects. Oh, and pay the accountants too. But how much money are we talking about that has poor Prince so upset? Let’s look at some numbers
2023
Young Tom O’Neill tells Prince the good news and the bad news. The good news is that his profits were high in the year ended 31st of March 2023. High, as in six figures high at €105,000 which was up €15,000 from the previous year. The bad news is that his tax liability increased because of the rise in profits. Prince knows that he paid a good chunk of Preliminary tax to take the sting out of it. He also wishes he had a hip flask to take a shot of whiskey as he awaits the gallows.
Tom confirms the number at €39,545
| Taxable Profit | €105,000 |
| First €40,000 X 20% | €8,000 |
| Balance €65,000 X 40% | €26,000 |
| Total | €34,000 |
| Tax credits | €4,000 |
| Tax Liability | €30,000 |
| Add PRSI & USC | €9,545 |
| Total Liability | €39,545 |
Prince paid €25,000 preliminary tax for 2023 so he owes the balance of €14,545. But then there’s preliminary tax for 2024 and Tom recommends that Prince should pay 100% of his 2023 tax bill. A total of €54,090. Prince is sick as he has €50,000 in his bank account but had earmarked €20,000 of that for a house deposit. Uncle Fester and Aunt Aileen are driving him mad since they joined the Jehovah’s Witness. They even took the TV’s out of the house.
Key Date
The key date for Prince to pay the tax is the 14th of November 2024. This is on the premise that he continues as a sole trader. So, he should pay
| Balance for 2023 | €14,545 |
| Preliminary Tax 2024 (100% rule) | €39,545 |
| Total | €54,090 |
Tom knows he’ll have the funds, but it will clear him out and he’ll be stuck with the relations for another year. Plus, he won’t be able to buy the new stock scanning control system that would make life much easier in the shop.
Limited Company
Tom O’Neill discussed the limited company option with Prince in September 2022. The March 2022 accounts showed a great profit of €95,000 and Prince thought the trend would continue. The shop is in an affluent area, and they have introduced some higher-margin products. Tom suggests a limited company structure for the business and to have that set up from 1 April 2023. Prince wasn’t sure how this would all work and would like to see some numbers and dates.
Year End Accounts
Tom suggests the company’s first year-end accounts go from the 1st of April 2023 to the 31st of March 2024. He bases his numbers on a profit of €106,000 before Prince’s salary.
Salary
Prince is saving €1,000 a month with his bank to build up for a house deposit. After that, he needs about €2,000 a month to live off. However, that could go up if the uncle and aunty don’t calm down. A gross salary of €46,000 would give him a net salary of €36,000 which gives him €3,000 a month.
Tom points out that Prince’s salary is a deductible expense so it will reduce the profits of the company. Plus, the lower rate band is €40,000 in 2023 but it’s likely to increase in future budgets. As a result, Prince’s net monthly income will increase in future years. And if he needs more, he can increase his salary. The company will pay the payroll taxes every month on the salary.
Corporation Tax
Corporation Tax is payable on the company profits. The first year-end is 31 March 2024, and the estimated profit will be €60,000
| Company Profits | €106,000 |
| Less Prince’s salary | €46,000 |
| Taxable Profit | €60,000 |
| Corporation Tax 12.5% | €7,500 |
So, the company taxes of €17,500 which are
| PAYE on Prince’s salary | €10,000 |
| Corporation Tax | €7,500 |
You’ll remember from the above that Prince would pay €39,500 in taxes as a sole trader. That’s a saving of €22,000 in year 1 of a limited company. Prince is young at 30 years old. If he saves that amount each year for the next 25 years, that comes to a healthy total of €550,000.
Payment Date
The Corporation Tax [CT] payment date for the year ended 31st of March 2024 is the 23rd of December 2024. It is the 23rd of the 9th month after your year-end date. That’s provided the accountant files the return and pays online which should happen. Otherwise, it is the 21st of the 9th month.
Preliminary Tax is also at play when it comes to Corporation Tax. For smaller companies, those with a CT liability of €200,000 or lower, it is due by the 23rd of the month before the year-end. The first preliminary CT will be for the year ending 31st of March 2025. That’s due by the 23rd of February 2025 and using the 100% rule the company would pay €7,500 on or before that date.
Why pay preliminary Corporation Tax
Like Income Tax, you pay preliminary Corporation Tax to avoid interest charges. If you are not sharp on your payment dates you can get caught for this with little room to appeal given the rates are set. And the rate isn’t low either at about 8% per annum.
Company name
Prince is sold on this great idea that Tom has, and he likes Tom a bit more now. The next thing he must do is come up with a company name. After much head-scratching, he comes up with Little Red Courgette Ltd. He knows Billy would approve.
Tom sets up the company in February 2023 and the company is incorporated on Valentine’s Day. It’s off to the bank then to set up a company bank account to be ready on the 1st of April.
Income Tax Tidy-up
Tom needs to do an Income Tax tidy when Prince ceases the sole trade on the 31st of March 2023. There’ll be a bit more tax to pay for 2022 but way less to pay for 2023.
2022
In 2022 Prince paid tax on profits of €90,000 based on his accounts for the year ended 31st of March 2022. When ceasing the sole trader business there is a review of the penultimate year. That’s the year before you cease. If the actual profits of the year before on a calendar year basis are greater than the profits assessed, you pay tax on the higher amount. The actual profits for 2022 are
| 1 Jan 2022 to 31 March 2022 €90,000/12X3 | €22,500 |
| 1 April 2022 to 31 Dec 2022 €105,000/12X9 | €78,750 |
| Total | €101,250 |
| Additional Profit in 2022 | €11,250 |
| Tax Payable 52% | €5,850 |
2023
In 2023 Prince isn’t taxed on his profits for the year to 31 March 2023 but for the 3 months ended 31st March 2023. The profits assessable are from the preceding 1 January to the date of cessation.
| 1 Jan 223 to 31 March 2023 €105,000/12X3 | €26,250 |
As such, Prince’s total income for 2023 that will be on his 2023 tax return will be €60,750
| Salary 9 months of 2023 €46,000 X 9/12 | €34,500 |
| Profits to cessation | €26,250 |
| Total | €60,750 |
| First €40,000 X 20% | €8,000 |
| Next €20,750 X 40% | €8,300 |
| Total | €16,300 |
| Less Tax credits | €4,000 |
| Tax liability | €12,300 |
| Add PRSI & USC | €4,411 |
| Less PAYE paid on salary | (€7,500) |
| Balance to pay | €9,211 |
For 2022 and 2023 Prince will pay €15,061.
If Prince continued his sole trade business his liability is €39,545. So a €24,000 saving in 2023 alone. Two thousand euros a month is very nice indeed. Plus, there’s no need to pay Preliminary Income Tax for 2024 as he only has his salary from the company.
Important Dates
The important dates for Prince to know his liabilities, company and personal, are
- 14th of November 2024 – Income Tax 22 & 23 €15,061
- 23rd of December 2024 – Corporation Tax 24 €7,500
- 23rd of February 2025 – Preliminary CT 25 €7,500
So, the company pays €15,000 in two months and he pays €15,061. If he already paid €25,000 preliminary tax, then he’s due back a refund of close to €10,000. That Tom fella is not so bad after all, Prince thinks. He could move out into a new home sooner than he thinks.
Summary
From a tax point of view, a company makes perfect sense for Prince. Profits are increasing and his tax liabilities are going in the same direction. Given his circumstances, he can afford to live off a lower salary but knows the money will be there if he needs more. This takes away the annual death row trip to the accountant. Plus, not being cleaned out every November means there’s more to grow the business. This extra cash in a limited company gives him the flexibility to do more things.
He now realises that being in the sole trader structure is hampering his future growth. It isn’t flexible at all and he’s paying huge tax on his profits. Tom gives him a call on one horrible wet day in December 2022. He thinks there are some planning opportunities when going into the limited company. This piques Prince’s interest, and he looks forward to meeting Tom next week.
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