The tax system for companies
There is a totally separate tax system for companies when compared to sole traders. The tax that is chargeable on company profits is called Corporation Tax, and is charged at 12.5% on the profits of the company.
The same rules for Income Tax for sole traders apply to companies in relation to allowable expenses. In other words if an expense is deductible from your income as a sole trader then it is deductible against the income of a company when charging Corporation Tax.
Profits for a sole trader versus the salary for directors of a limited company
For a sole trader, you pay Income Tax on all your profits for the year - whether you take them out of the business or not. This means that in bad years, you pay very little tax, but in good years you get hit with full tax on everything - whereas you could leave money in a limited company and only pay 12.5% on the money you leave in the company.
Pension contribution limits for sole traders versus company directors
For a sole trader, you are limited in the amount you can pay in to a pension by reason of your age. If you are under 30, you can contribute 15% of your profits, between 30 and 39 max contributions are 20%. As you enter your 40s this rises to 25%. Between 50 and 54 your max level of contributions are 30% and between 55 and 59 it's 35%. Finally 60 years and over means you can pay 40% of your earnings in to a pension. However, if you have a limited company you can put as much as your like in to a pension fund, up to a max of €2 million.
Salaries for others in the business
As a sole trader you can employ family members to work for you, but the salaries you pay have to be related to how much a comparable worker in the same job could get from another company. However if a family member acts as a director, you are not as restrained in the amount that you can pay. The person can contribute to the business and as a office holder they can take whatever the other director or directors view as appropriate.
Salary for you a director
An employer who employs you will have to pay Employers PRSI, which is 10.85% of your salary. However if you are a director employee you don't have to pay this contribution. This is a major cost advantage for you over other competing companies as you can take that extra 10%.
Income Tax Return
If you own more than 15% of the shares of a limited company you will have to file an Income Tax Return. This can be a bit of a chore, but fortunately if you hire us to look after your affairs, we will do this for you as your accountants each year. Otherwise you have to get all your earnings and file an Income Tax Return with Revenue.