We are very aware that the biggest cause for concern for business, at the moment, is the Covid-19 crisis. There are a lot of difficulties in certain industries such as the hospitality sector. There has been some good news from the government, with a focus on industry-specific supports. They will introduce these in the coming months.
We have a dedicated webpage outlining the supports that are out there. There is lots of information and free downloads, so please have a look. Click here
Our blog last week dealt with various pains and issues a business owner can experience. Read here Issues from paying too much tax to not being in control of the numbers and a few more too. The focus this week is to take a closer look to see what could be workable solutions for the problems raised.
My Tax bill is too high
Last week Boris had a tax bill of €30,000 which was the same figures as his drawings for 2019. Of his €100,000 profit €30,000 was going to Revenue and he was taking €30,000. Loan repayments had taken care of the balance. If Boris put his trade through a limited company it would give him more scope for being tax efficient. Some of the key taxation aspects of an Irish company that you need to know about are;
- A company pays 12.5% corporation tax on its trading profits
- An owner-director can plan their salary to maximise lower tax rates
- Investment income like rental income and deposit interest will be taxed at 25%
Boris would need a gross salary of €37,500 to leave him with a net salary of €30,000. This salary of €37,500 would be a deductible expense against the profits of the company. Before the salary deduction, the profit was €100,000. After deducting the salary the revised profit is now €62,500. As this is a trading profit it would be liable to corporation tax at 12.5%. This would be a corporation tax bill of €7,800. In the new structure the total taxes payable by Boris and the company are €15,300.
|1||The company pays PAYE of||€7,500|
|2||The company pays Corporation Tax of||€7,800|
Boris, as a sole trader had an Income Tax bill of €30,000 because he was paying Income Tax rates on the full profit of €100,000. As you will see there is a serious tax saving of €14,700. This is a saving in one year. If you were able to save this amount over 20 years it is not far away from €300,000. This is a very large amount of money. It could grow the business, pay loans down quicker, or fund a pension for the company owner.
Spouse works in the business but has no Social Insurance contribution
In our previous blog you will see that Boris’ wife Trudi worked in the business on a part-time basis. She was on a small salary of €10,000. As the spouse of a company owner-director Trudi’s salary would be liable to PRSI at 4%. This would be a class S PRSI rate and would entitle Trudi to the same benefits as a self-employed individual. Trudi could be a director herself and this would make sense as an Irish company needs to have two directors.
The reason for this is that the limited company is a separate legal entity. The company is the employer and not Boris in this case. When you are a director/shareholder, and have control of the company, then you will pay PRSI at Class S. Read more here. To pay PRSI you would have to have a salary of €5,000 or more per annum. Trudi would pay a PRSI contribution of €500 as that is the smallest PRSI payment that she has to make. This would give her 52 weeks contributions for the year she made the payment. This would come off her salary and the company pays this as part of its PAYE obligations.
This is an ideal solution. Now Trudi will be building up her PRSI contributions. These will count toward maternity benefit and the state pension among other benefits.
I have no pension and fear it is too late to start now
In the previous blog the problem that Boris had was that he didn’t have the funds to contribute to a pension scheme. He was only keeping his head above water with the loan and tax payments. With the tax saving of close to €15,000 Boris could decide to use some of this excess cash to fund a pension for himself. This is a super way of using company money to fund a personal asset for the company owner. There are many benefits to this with the main ones being;
- the company gets tax relief on the pension contributions at 12.5%
- Reducing excess cash in the company which can become an issue when passing on the company
- Converting company cash to a personal asset of the company owner
- Pensions grow tax-free
- Can take 25% or 1.5 times final salary as a tax-free lump sum
- Balance of pension is the owner’s asset from which he/she can draw down an income and pass on tax-free to a spouse
At the age of 40 Boris makes a wise decision to trade through a company. He sets-up a company pension scheme with a contribution of €1,000 per month until the age of 67. Based on a 5% growth rate the pension fund would come to over €500,000. He could take 25% being €125,000 as a tax-free lump sum. The balance of €375,000 could go into an Approved Retirement Fund [ARF] which is his pension asset. He could draw down at least 5% of the value of that fund which would give him an annual pension of €18,750. He would also qualify for the State pension which currently is about €12,500 per annum. So in total he would have pensions of over €30,000 per annum.
Business is expanding and is looking to take on bigger projects & more employees
Let’s assume that Boris is a savvy business owner. His business is growing. He is taking on more & larger customers so his profits are going in the right direction. He has a very nice home in the posh part of Tramore, which the locals call T4. He owns two rental properties and Trudi has a share portfolio.
As Boris’ company is becoming more profitable he worries about protecting personal assets. He knows working with larger companies on bigger projects is more rewarding. He is also very aware that they carry a higher level of risk, in the event of something going wrong.
The company is owed a lot of money from some larger clients. It would be in a difficult financial position if it wasn’t paid by a few of them. This is a possibility if a recession came along
He also has more staff to look after. He worries that, because of the greater numbers, there is a greater risk of legal action by an employee.
The overriding concern for Boris is to protect his private wealth. If a client or an employee took a case against his company he thinks he should be ok. He has professional indemnity and employer’s liability insurance. The major worry is if the company was unable to pay its debts because of not getting paid the money it is due. If Boris was trading as a sole trader or a partner in a partnership, then he would be liable for the business debts. He may have to sell some of his assets to pay off the debt that his business owes. This could be a business creditor, banks, or a Revenue debt.
A company is only liable for debts, to the extent that there are assets in the company to pay those debts. If the company owed €400,000 and only had assets of €250,000 that money would pay creditors. Boris wouldn’t be liable for the shortfall of €150,000. This is what’s called limited liability and is one of the key benefits of having a company See more info here
It is quite common that many large companies will only work with other limited companies.
I don’t know my numbers except how close I am to my overdraft limit
I am hopeless at a lot of things. I can’t service my car, I can’t pull my teeth nor can I self-diagnose what’s wrong with me if I am feeling sick. I am very bad at DIY and the only tools that I own are a hammer and a screwdriver, both of which were presents. I have never been to IKEA and it is not on my bucket list. So I need the services of a good mechanic, dentist, and doctor. If something is wrong in the house that involves plumbing or electrical I don’t get out my tools and have a go at fixing it. The reason is I know the things that I am bad at and they are many.
So please tell me why do so many people think they can do bookkeeping when they are not trained, bookkeepers? I don’t understand why that is. I had a root canal problem last year. I didn’t wake up one morning and decide that I was a dentist so I’ll give that a go and fix it myself. There must be a youtube clip to follow!! The key message I want to get across is that you need to outsource your bookkeeping. It is vital that a professional looks after it. This is an investment in your own time and your business. Don’t waste time and money doing something you are not competent to do. This is the time that you can spend doing what you are good at which is your business. Doing it yourself, when you are not trained to do it, costs you money in the long run and common mistakes we see are;
- Incorrect returns
- Late returns
- Miss-posting of invoices in accounting software
- Unclaimed taxes
- Tax clearance out of date
- Revenue queries
Sometimes we tidy up the mess that we get from poor bookkeeping. This can be a pain for us and a pain for the client as we have to charge them more. They are not getting any huge value for the additional cost. Think like a business person and realise what you are good at but also know what you can’t do. Investing in your finance function will reap you rewards over time.
With a limited company it is very important to keep books and records to a very high standard. There are more reporting requirements with Revenue and the Companies Registration Office [CRO]. It is vital that everything is correct and submitted on time. This makes your life less stressful. You will have the confidence that everything is being looked after. As the business grows you will need to invest more in the finance function. You can look at management accounts. This means you are getting good numbers during the year to make business decisions. This will turn the needle in the right direction in your business - check out a business growth journey
As you can see from the above we are major fans of a company structure to run a business. The key is that running your business through a limited company has so many benefits. The positives outweigh the negatives. We have discussed some of the positives such as tax, pensions, and limited liability. We will do a future blog on the negatives. Next week we will talk about how we can help you to achieve more. This can be a company for your new business or help you move your existing business into a company.
If you have some pains and want your business to enjoy some of the solutions, please book a call with Colin or Ger. Send a message to firstname.lastname@example.org or call Deirdre on 051 396703 and we will arrange a call. Let us know some of the issues you are having beforehand so we can use the time on the call well.