It’s decision time for many company directors across the country. Should I take a bonus? We will look at a few examples of what I am talking about. One of which is how your business can help with personal wealth. The focus will be on Bar Coad Ltd and the options for Tommy. Talking points will be
- Introduction
- Tax rates for companies
- Bonus for 2022
- Timings
- Where a bonus makes sense
- Summary
Introduction
Tommy Coad is 44 with a young family. He has a small but successful architect’s business called Bar Coad Ltd. They specialise in the design of bars and restaurants. To his surprise, they landed a big job with the local council in 2022 for a tourist centre which led to a boost in profits.
Tommy earns €100,000 a year and needs every bit of it to pay a hefty mortgage and keep the family going. Profits in Bar Coad Ltd for 2022 were €200,000 and were €150,000 for 2021. His company is a professional services firm. Much to his annoyance that means it must pay a professional services surcharge every year. He leaves that to his accountant Reg who is a dab hand at the numbers.
The Coads are adding an extension to the house after the birth of number 5 Cody. Tommy has Kilkenny connections and his wife Clare, from Clare, had naming rights if it was a girl. Number 6 will be Kelly, boy or girl! The extension will cost €50,000 and he is looking to top up the mortgage to get the cash. He will put this over 15 years. Tommy also owes the company €10,000 and Reg told him he’ll have to pay BIK and Income Tax on that.
Tax rates for companies
Warning. Numbers ahead! Stick with us. It gets more interesting. I promise.
We all know the main tax rate for a company is 12.5% but that is for trading income. The tax rate for investment income like rent and deposit interest is 25%. What is less well known are close company surcharges. The impact of the surcharges is to bring the tax rate to
- 19% for professional services companies and
- 40% for investment income retained in a company
The professional service surcharge came in based on a fear of a loss of Income Tax. The fear was that professionals paying high Income Tax could move those profits to a company. And the resulting benefit of a lower corporate tax rate of 12.5%.
Surcharge Example
Remember profits in Bar Coad Ltd were €150,000 in the year ended 31 December 2021. The surcharge for that year looks like this
| Case 11 Profit | €150,000 |
| Deduction for CT 12.5% | €18,750 |
| Distributable trading income | €131,250 |
| Less 50% | €65,625 |
| Surchargeable amount | €65,625 |
| Surcharge 15% | €9,844 |
| Total Tax [€18,750+€9,844] | €28,594 |
| Effective Rate [€28,594/€150,000] | 19.06% |
The surcharge for 2021 isn’t payable with the 2021 Corporation tax liability. It falls due with the CT liability for 2022.
2022 Liability
There are many factors when doing the numbers for 2022, including
- Professional services withholding tax deducted from the council project of €15000
- The income tax liability on the €10,000 loan to Tommy from the company and
- The 2021 surcharge as above
| Case 11 Profit | €200,000 |
| CT liability 12.5% | €25,000 |
| Income Tax on Loan €10k x 25% | €2,500 |
| Add 2021 services surcharge | €9,844 |
| Total Tax | €37,344 |
| Less Preliminary CT paid | €25,000 |
| Less Withholding Tax | €15,000 |
| Refund Due | €2,656 |
Bonus for 2022
Should Tommy take a bonus for 2022? Reg has it on the agenda for the meeting this month to go through the 2022 accounts and tax returns. It’s not something Tommy would have thought about until young Reg put it into his head a few weeks ago. It has piqued his interest since. There could be a way of not having to beg for money from the bank!
The two main issues for Tommy are that he needs to pay back the €10k loan to the company and get his hands on €50k. A bonus to get €60k net is €125k gross.
| Bonus | €125,000 |
| Less Taxes PAYE, PRSI, USC 52% | €65,000 |
| Net bonus | €60,000 |
Tommy’s eyes start to water at the thought of paying Revenue €65k in taxes. He feels a little unwell and heads to the toilet. It’s like as if the young lad came home from town wearing a Tipp jersey.
Tax & Other Savings
Reg expected this reaction and had a few numbers prepared to lessen the blow. Provided the bonus goes through in June 2023 it can go into the 2022 accounts as an expense. The 2022 profits will reduce to €75,000. Plus, once he clears the loan from the company, there is no need to pay Income Tax on it. The revised 2022 numbers will look like this
| Case 11 Profits | €75,000 |
| CT liability 12.5% | €9,375 |
| Add 2021 Surcharge | €9,844 |
| Total Tax | €19,219 |
| Less Preliminary CT paid | €25,000 |
| Less Withholding tax | €15,000 |
| Refund due | €20,781 |
There will be more tax savings as the 2022 surcharge will reduce and there will be no more BIK on the loan.
| Surcharge saving €125k x 6.5% | €8,125 |
| BIK €10K x 13.5% x 52% | €702 |
| Total | €8,827 |
With the refund due and the other tax savings we are getting closer to the €30k mark. A bit of colour is starting to return to Tommy’s face.
Mortgage
I used the EBS mortgage repayment calculator borrowing €50k for 15 years. With 5 years fixed the monthly repayment is €382.50
| Monthly repayment €382.5 x 180 | €68,850 |
| Amount borrowed | €50,000 |
| Interest charge | €18,850 |
Tommy is aware that the ECB is signalling another rate increase, so interest costs are going one way. Like the Yazz song. “The only way is up, baby, for you and me now.”
Timings
The timings are important here as Tommy must decide by the end of this month if he will go for the bonus or not. You have 6 months from the end of your accounting period to make that decision. The benefit of doing this within the 6 months is that it brings forward the tax savings.
As you will see the 2022 Corporation tax liability reduces. The plan would be to file the 2022 CT return asap and get the €20k back straight away. It will be useful to have that in the bank as the tax on the bonus would be due on the 23rd of July. If you miss the 6-month deadline you will still get the benefits, but it delays them. Processing the bonus in July would result in a CT deduction for 2023, payable in 2024. And a surcharge saving for 2023, which is payable with the 2024 CT return, in 2025.
I know, it all seems a bit confusing but it’s not. The 6-month date is the key one. But there’s no point even thinking about this unless you know your numbers with the 6-month window. One of the advantages of having your accounts done early.
Decision Time
It’s decision time for Tommy. It’s an easier one to make now. He’d have to spend €65k but could save close to €50k. But can the company afford it? Now there’s €255k in the company account and after spending €125k there will be €140k left. Add the CT refund to that and the bank is back to €160k. He’s happy with that as he knows business is strong and more payments are due than bills to pay.
Where a bonus makes sense
There can be other circumstances where a bonus makes sense. We used an example of saving mortgage interest. But you could be paying higher interest on a car loan or credit card balance. Clearing those loans will save you more.
We thought taking a bonus made sense for an older director. That director is 66 and has a salary and pension of €25,000. His wife doesn’t have an income. As a married couple, over 65, they can earn up to €38,000 and not pay any Income tax. In his case, a bonus of €13000 would save corporation tax at 12.5% which comes to €1625. There would be a small amount of USC to pay.
In another case, I had a meeting with a company owner, and he told me he takes a salary of €40k. That’s all he could earn at the lower rate, in his head. But when we dug into the detail a bit more, his wife was working in the business and not taking a salary. In his 2022 accounts, they decide to declare a bonus of €27,800 for his wife.
Taxes on a bonus of €27.8k
How would the taxes look on that bonus for 2022?
| Bonus | €27,800 |
| Income Tax 20% | €5,560 |
| Less Earned Income Credit | €1,700 |
| Net Income Tax | €3,860 |
| Add PRSI 4% | €1,112 |
| Add USC | €539 |
| Total Tax | €5,511 |
| Less CT deduction €27.8k x12.5% | €3,475 |
| Tax costs | €2,036 |
| Effective tax rate | 7.32% |
It’s important to make sure you get your Income Tax return right when declaring a bonus like this. The bonus relates to the 2022 tax year, so you must include it on your 2022 tax return.
Summary
A bonus is not for everyone but can make sense when the company is in funds to pay, and it can help you clear personal debt. Or even build a cash reserve for an upcoming cost. College fees, a family wedding, or a house deposit for the kids come to mind. A bonus of €100k a year for the next 4 years could clear a €200k mortgage. Having an efficient bookkeeping system can help you have those numbers early so you can plan on time. Sure, isn’t it paying for Cody Coad’s new bedroom!
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