We are dragging ourselves through January which was best described by a friend as a very bland month. We will persevere and hope is on the horizon. Great to see numbers dropping in a small way. It’s fantastic to see healthcare workers and people in nursing homes getting vaccinated. It would be a major plus to see kids going back to school although they may not think so!
“The greatest glory in living lies not in never falling, but in rising every time we fall” Nelson Mandela
Last week we spoke about business supports to help your business during the pandemic. For more information on this click here
This week we are going to look at salaries in companies. This blog aims to give owner directors an understanding of taxes on salaries. It will be a back to basics look at the Income Tax rates and tax bands. It will show how you can maximise lower rate bands. There can be planning opportunities for husband and wife or civil partner companies. Everyone’s circumstances are different so we will give a few examples to look at the numbers.
The basics
For 2021 the tax bands are as follows;
| Single | First €35,300 | 20% |
| Single Parent | First €39,300 | 20% |
| Married (One Income) | First €44,300 | 20%* |
| Married (Two Incomes) | Up to €70,600 | 20% |
* if one spouse uses the first €44,300 the other spouse can earn up to €26,300 at the lower rate
Income more than the above bands is at 40% – Link to tax rates and credits
The main tax credits are
| Single | €1,650 | |
| Married | €3,300 | |
| Single Parent | €1,650 | |
| PAYE | €1,650 | |
| Earned Income | €1,650 |
I wanted to give you these numbers so that you will see how they work through a salary calculation. You will be living on the amount, net of salary, so need to know what’s left after Paschal gets his share.
The only other deductions from your salary will be 4% employee PRSI and USC. USC kicks in once your salary is greater than €13,000. The computation follows the basic rules of
- First, apply the tax rates to the salary at 20% and 40%
- Then deduct your tax credits to get the net income tax
- Add PRSI
- Add USC
- Add net income tax, PRSI and USC and deduct that figure to get net salary
Company Director – Salary €40,000 [Single]
Jacinta Kardashian has recently started a public relations company DashCan Ltd. In 2021 she expects to have sales of €75,000 and expenses of €20,000. She needs an income of €2,750 per month to live off. She wants to know if a salary of €40,000 will give her enough net income.
| First €35,300 | 20% | €7,060 |
| Next €4,700 | 40% | €1,880 |
| Total | €8,940 | |
| Less Tax credits | ||
| Single | €1,650 | |
| Earned Income | €1,650 | |
| Net Income Tax | €5,640 | |
| Add PRSI | 4% | €1,600 |
| Add USC | various | €1,103 |
| Total Tax | €8,343 | |
| Net Salary | €31,657 | |
| Net salary per month | €2,638 |
Based on the above figures she is short over €100 per month. Next week we will look at ways to make up the deficit without adjusting the salary.
Company Directors – Married – Two incomes €80,000
Ian & Claire have a wine tasting company, called Iloverioja Ltd, to help the trade pick good wines. Claire works full-time in the business and Ian part-time. Claire earns €60,000 and Ian €20,000.
Their net monthly income is as follows;
| First €64,300 | 20% | €12,860 |
| Next €15,700 | 40% | €6,280 |
| Total | €19,140 | |
| Less Tax credits | ||
| Married | €3,300 | |
| Earned Income x 2 | €3,300 | |
| Net Income Tax | €12,540 | |
| Add PRSI | 4% | €3,200 |
| Add USC | various | €2,222 |
| Total Tax | €17,962 | |
| Net Salary | €62,038 | |
| Net Salary per month | €5,170 | |
You will see that they are not maximising the lower rate bands. They are only using €64,300 out of a possible €70,600 at the lower rate. If salaries were €50,000 for Claire and €30,000 for Ian then they would use all the lower rate band. This would increase the net salary to €5,276 per month
Company Director – Married – One Income
Bob Pfizer is setting up a new pharma company in Cork making coloured tablets. He is married with 10 children and needs €6,000 net per month to pay the mortgage and feed the children. He wants to know what gross salary would he need to arrive at the net. The gross salary would be €111,350.
| First €44,300 | 20% | €8,860 |
| Next €67,050 | 40% | €26,820 |
| Total | €35,680 | |
| Less Tax credits | ||
| Married | €3,300 | |
| Earned Income | €1,650 | |
| Homecarers | €1,600 | |
| Net Income Tax | €29,130 | |
| Add PRSI | 4% | €4,454 |
| Add USC | various | €5,759 |
| Total Tax | €39,343 | |
| Net Salary | €72,007 | |
| Net salary per month | €6,000 |
Salary is an expense in your company
You saw the level of salaries in the above examples. As salary will be an expense it will reduce the profits of the company. If we look at DashCan Ltd Jacinta will save €5,000 corporation tax on her salary. This is €40,000 at 12.5%.
| Turnover | €75,000 | |
| Less Salary | €40,000 | |
| Less Other expenses | €20,000 | |
| Company Profit | €15,000 | |
| Corporation Tax on company profit | 12.5% | €1,875 |
You will see that the company has paid total taxes of €10,218 being PAYE of €8,343 and corporation tax of €1,875.
Summary
The above is to give you an overview of how you arrive at a net salary that you need to live off. This is very important when starting a company as funds will be tighter. Your salaries could be inefficient now if a lower income earner could be earning more for the work they do. As we have a very progressive taxation system in Ireland the more you earn the more tax you pay. If you need all the profits as salary there may not be an advantage to a company in the first place.
Interested in talking with us? Call Deirdre on 051396703 or start here to tell us more about you and your business
