TAX BENEFITS OF TRADING THROUGH A COMPANY

We are often asked if it is better to trade through a company instead of being a sole trader/ self employed.

The benefit of limited liability for trading through a company should always be borne in mind.

The 12.5% company tax rate is very attractive when compared to the top personal tax rates of 55% made up of income tax at 40%, PRSI at 4% and the top USC rate of 11% for profits over a €100K. This means a tax difference of €42.50 for every €100 profit.

However getting this tax benefit all depends on the profitability of the business and the salary requirements of the owners.

Consider the following example-

  • John is single and runs a small business and makes €50K per annum profit.
  • John needs a gross salary of €40k. So if trading as a company John gets €40k and the company profit is €10K.
  • So what is the tax difference between trading as a company and being self employed?
  • As a self employed sole trader Johns annual tax bill is circa €14,000 which leaves John a net income of €36,000 ( €50,000 – €14,000).
  • As a company there are two tax bills to make up, one for the company which will be €10k X 12.5%= €1,250 and
  • the tax due on John’s gross salary of €40k will be circa €9,100.
  • So the combined company tax bill and John’s tax bill on his €40k salary is €10,350.
  • The annual tax saving by trading through a company for John is €4,000 provided John can live on a reduced net income of €30,000.

The company should have circa €8,750 in the bank which it can use to make investments which would add to the value of the company in the long run.

The greater the profits in the company the greater the tax savings.

Consider another example-

  • Mary is single and runs a small business and makes €100K per annum profit.
  • Mary needs a gross salary of €50k. So if trading as a company Mary gets €50k and the company profit is €50K.
  • So what is the tax difference between trading as a company and being self employed?
  • As a self employed sole trader Mary’s annual tax bill is circa €38,500 which leaves Mary a net income of €61,500 ( €100,000 – €38,500).
  • As a company there are two tax bills to make up, one for the company which will be €50k X 12.5%= €6,250 and
  • The tax due on Mary’s gross salary of €50k will be circa €14,000.
  • So the combined company tax bill and Mary’s tax bill on her €50k salary is €20,250.
  • The annual tax saving by trading through a company for Mary is circa €18,250 provided Mary can live on a reduced net income of €36,000.

The company should have circa €43,750 in the bank which it can use to make investments which would add to the value of the company in the long run.

These two simple examples show how a company can be used to pay less tax and to use the tax saved for making investments. As the company grows in value other steps can be taken to keep the accumulated profits/ investments safe and sound and legitimately away from trade creditors just in case business ever goes bad.

Using a limited company has certain additional administrative costs such as the requirement of annual accounts for the Companies Registration Office and the submission of an annual company tax return form. Our new online accounts system for small business reduces these costs considerably by taking advantage of company law rules for small companies.

We can also provide expert tax advice as and when required to ensure you pay less tax.

If you would like more details on what services we can provide for small business please contact our office.

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