Tax "efficiency"

Yendred

Folks,
I have landed myself a 6-month contract in the IT world and have applied to set up a private limited company. My customer pays the company and the company pays me. Naturally the customer will pay the company after I send them an invoice so the company will receive funds to pay me some time next year.
I returned to Ireland from Australia during the year and this is the first piece of work I have done in Ireland in more than 18 months.
I want to reduce my total income tax liability for the duration of the contract by paying myself as much as is feasible during this year and reducing my salary by a corresponding amount next year. I could organise a loan from a bank, probably backed by my personal SSIA, to facilitate this.
What I would like to know is:

• Is this kocher at all?
• What are the likely effects of see-sawing PAYE/PRSI payments like this?
• Are the Revenue are likely to raise their eyebrows if I am paid my anual tax-free-allowance etc for just the month of December and then much lower amounts next year? The last thing I want is to be audited and have to cough up tax, interest and penalties. That would be a poor start!

Thanks in advance.

-Yendred.

information

Its perfectly legal to use your yearly tax allowance for a one off payment in December.

There is no need to get a bank loan for the full amount.

Simply get a loan to pay the amount of tax.
Then you personally loan the company the rest of the money that you will pay yourself as salary.

1. So the company gets a bank loan to pay the tax on your salary.
2. You loan the company the money to pay the actual cash value of your salary.
3. You pay yourself the salary.
4. The company repays the loan to you when it has the funds.

Steps 2 & 3 will cancel each other out so there will be no actual cash exchanged it will all be on paper.
1. You will need to personally guarantee the loan and the interested is treated as a company expense.

Yendred

information wrote:

Its perfectly legal to use your yearly tax allowance for a one off payment in December.

There is no need to get a bank loan for the full amount.

Simply get a loan to pay the amount of tax.
Then you personally loan the company the rest of the money that you will pay yourself as salary.

1. So the company gets a bank loan to pay the tax on your salary.
2. You loan the company the money to pay the actual cash value of your salary.
3. You pay yourself the salary.
4. The company repays the loan to you when it has the funds.

Steps 2 & 3 will cancel each other out so there will be no actual cash exchanged it will all be on paper.
1. You will need to personally guarantee the loan and the interested is treated as a company expense.

Thanks Information, you are certainly informational, I can tell you!
Can I go as high as the end of the 20% tax band or to the equivalent of the tax fee allowance?

kluivert

@ Information - interest charged on personal loans for a company can not be claimed as a deduction within the company.

A bit more information is needed to work that one out.

Are you single or married.
What is your standard cut off point for 2006.
What is your tax free credits for 2006.

Based on a single person your tax credits for 2006 are €3120, thus anything up to €15600 is below the exemption limit, therefore no employees Paye or Prsi.

Bare in mind the the Employers Prsi is 5%, which is €780 to be paid by 15th January 2007 in your P30 Return for December 2006 and included in the P35 Annual Return for 2006.

You have a chose here:

1. The company borrows €16,380 from the bank and pays you €15600 as a directors remuneration. The repayments are spread over one year typical APR at 9%. Thus total repaid will be €17,189.46.

2. The company gives you a directors remuneration of €15,600 and pays you in 2007 when it has the money.

Directors Remuneration will show €15,600. (Db)
Directors Current Account will show €15,600. (Cr)

The Prsi is paid to the Revenue and the company pays your planned directors remuneration for 2007 + the remuneration owed from 2006.

Yendred

kluivert wrote:

@ Information - interest charged on personal loans for a company can not be claimed as a deduction within the company.

A bit more information is needed to work that one out.

Are you single or married.

Single, never married.

kluivert wrote:

What is your standard cut off point for 2006.
What is your tax free credits for 2006.

For the last 18 months I have had no income that wasn't a tax refund for 2005. I just signed a lease on a flat but I doubt that I will get the allowance for that sorted out by the end of December. You never know.

kluivert wrote:

Based on a single person your tax credits for 2006 are €3120, thus anything up to €15600 is below the exemption limit, therefore no employees Paye or Prsi.

Bare in mind the the Employers Prsi is 5%, which is €780 to be paid by 15th January 2007 in your P30 Return for December 2006 and included in the P35 Annual Return for 2006.

You have a chose here:

1. The company borrows €16,380 from the bank and pays you €15600 as a directors remuneration. The repayments are spread over one year typical APR at 9%. Thus total repaid will be €17,189.46.

2. The company gives you a directors remuneration of €15,600 and pays you in 2007 when it has the money.

Directors Remuneration will show €15,600. (Db)
Directors Current Account will show €15,600. (Cr)

The Prsi is paid to the Revenue and the company pays your planned directors remuneration for 2007 + the remuneration owed from 2006.

I'll probably go for a mix of 1 and 2 to minimise the interest paid and manage my own personal cash flow. Seeing as the only contract I got was for six months it might make sense to pay it off over roughly that time frame instead of over the year.

• I had planned on making a pension payment of 15% of salary. This would bring the remuneration to about E16800 with a corresponding increase in employers' PRSI without starting to pay employees' taxes.
• Does this mean that I can't bring the remuneration to just under the 42% band for December? This is something like E32,000 allowing for 15% pension payment.

Thanks!

kluivert

1. A company can pay into a pension for a director with no additional PRSI.

However if a company pays a AVC then this is treated as BIK, and PRSI is operated on this amount in the period in which it is paid.

You will only save yourself 20% on your tax liability in making the pension payment, if you hit the 42% tax bracket you will be savings at this rate.

Am not sure what you are saying about the pension fully.

If you want to contribute towards a pension you need cash. If you are going to contribute to the pension yourself, then you would be able to receive a directors remuneration for €18,352.94 of which 15% or €2,752.94 goes towards a pension and you receive €15,600.00


2. You can pay yourself what ever you want at the end of the day, in order to make the most of your tax free credits as asked earlier you could pay yourself up to a max of 15600 for 2006 tax free, if you go over this then income up to 32000 will be taxed at 20%, anything over this will be taxed at 42%.

information

Just to clarify my point:

If you have enough money to live on, then based on Kluivrts figures
you only need to borrow the 780 to pay tax

the 15,800 could be a paper transaction, so there would be no need to borrow that amount from the bank.

Yet you would still get the money tax free when the company repays the loan.

Yendred

kluivert wrote:

1. A company can pay into a pension for a director with no additional PRSI.

Ah. Good to know.

kluivert wrote:

However if a company pays a AVC then this is treated as BIK, and PRSI is operated on this amount in the period in which it is paid.

You will only save yourself 20% on your tax liability in making the pension payment, if you hit the 42% tax bracket you will be savings at this rate.

Am not sure what you are saying about the pension fully.

I misunderstood. Pay no attention.

kluivert wrote:

If you want to contribute towards a pension you need cash. If you are going to contribute to the pension yourself, then you would be able to receive a directors remuneration for €18,352.94 of which 15% or €2,752.94 goes towards a pension and you receive €15,600.00

Grand.

kluivert wrote:

2. You can pay yourself what ever you want at the end of the day, in order to make the most of your tax free credits as asked earlier you could pay yourself up to a max of 15600 for 2006 tax free, if you go over this then income up to 32000 will be taxed at 20%, anything over this will be taxed at 42%.

Thanks Kluivert!:)

Carb

Now for the boring bit.

In the absence of a charter for this forum (work in progress), please remember that any advice you use from this forum is at your own risk. Although we know most of the people posting replies are from an accountancy/business background, please regard all comments as opinions rather than professional advice.

On a side note, isn't there some part of company/tax law that says that the remuneration should reflect the work done, ie a company paying a director for work that he has yet to do could be a bit suspect, although its probably one of those subjective laws that isn't really enforced.

Yendred

Carb wrote:

Now for the boring bit.

In the absence of a charter for this forum (work in progress), please remember that any advice you use from this forum is at your own risk. Although we know most of the people posting replies are from an accountancy/business background, please regard all comments as opinions rather than professional advice.

The advice has been worth every penny.

Carb wrote:

On a side note, isn't there some part of company/tax law that says that the remuneration should reflect the work done, ie a company paying a director for work that he has yet to do could be a bit suspect, although its probably one of those subjective laws that isn't really enforced.

Don't get me started on that one...

information

kluivert wrote:

Based on a single person your tax credits for 2006 are €3120

does the above figure not include the paye tax credit which he should not be entitled to as he is a prop. director?

Carb

Forgot to mention that if you lend the company the money to pay you a lump sum, when you take that lump sum, the company will be insolvent. In your case its not really a big issue as you will be recouping the money in the next six months so it will be sorted before the year end accounts/returns and the directors loan will be the only liability before that, but technically, it's still a breach of company law to trade while insolvent.

BTW, I'm not always this pessimistic;) .

kluivert

information wrote:

does the above figure not include the paye tax credit which he should not be entitled to as he is a prop. director?

Your right, A director can only get a single persons credit.

However the exemption limit still applies AFAIK.

Carb - The company will be in breach in Companies Act Section 40 where the liabilities exceed the net assets of the company, the company is required to have an EGM within 28 days from first notification of the breach.

information

kluivert wrote:

However the exemption limit still applies AFAIK.

not trying to argue but how did you work out your figures?

http://www.revenue.ie/index.htm?/leaflets/it1.htm
http://www.revenue.ie/index.htm?/revguide/payeemployeetaxcredit.htm

kluivert

information wrote:

not trying to argue but how did you work out your figures?

http://www.revenue.ie/index.htm?/leaflets/it1.htm
http://www.revenue.ie/index.htm?/revguide/payeemployeetaxcredit.htm

Another flop. Sorry

Maximum income before taxation is 8150e paid in December with 407.50 being owed for Prsi.

Thanks Information but putting me straight on that one.

One of my pet hates - giving wrong info.

Never be afraid of correcting someone, especially when your 100% that the information is accurately wrong.

information

kluivert wrote:

Maximum income before taxation is 8150e paid in December with 407.50 being owed for Prsi.

the PRSI due is €253
as there is no need to pay the health contribution giving €244
but minimum PRSI payment is €253

kluivert wrote:

Never be afraid of correcting someone, especially when your 100% that the information is accurately wrong.

My accountant is doing something like this for me and he said the figure was around 17k, so I thought I was missing something.

kluivert

information wrote:

the PRSI due is €253
as there is no need to pay the health contribution giving €244
but minimum PRSI payment is €253.

Sorry to do this again.

From my understanding Prsi is based on weekly earnings and not the average over the year. Prsi is not operated on an accumlative basis unlike Paye tax credits.

If the OP pays himself €8150 say on the last week of December 2006 then the effective Prsi rate is 5% (Above €440 per week) and thus €407.50.

If the OP paid himself €8150 over the course of one year (52 weeks), then the effective prsi rate is 3% (Below €440 per week) and thus the Prsi payable over to the Revenue over a 52 weeks is 244.49 or the mimumum, €253 as you pointed out.

The way you have pointed out works cheaper for him. However if he regsitered for Paye tax in December, would he be able to complete paye records for 52 weeks of 2006?

blindeyes

kluivert wrote:

Sorry to do this again.

From my understanding Prsi is based on weekly earnings and not the average over the year. Prsi is not operated on an accumlative basis unlike Paye tax credits.

If the OP pays himself €8150 say on the last week of December 2006 then the effective Prsi rate is 5% (Above €440 per week) and thus €407.50.

If the OP paid himself €8150 over the course of one year (52 weeks), then

From my understanding your understanding is incorrect. If I get the chance over the next couple of days I'll correct your errors........give you a chance maybe to relook the actual rules not just your variation and see if you can correct them yourself.:mad: Thanks.
Buyer beware.:D

Kinetic^

Buyer Beware? I don't think anybody bought anything!!!! :rolleyes:

Carb

blindeyes wrote:

From my understanding your understanding is incorrect. If I get the chance over the next couple of days I'll correct your errors........give you a chance maybe to relook the actual rules not just your variation and see if you can correct them yourself.:mad: Thanks.
Buyer beware.:D

Kluivert is actually correct about the PRSI exemptions been related to weekly earnings. Where the error is made here, is that as a company director, the OP would pay PRSI as Class S ie. 5% if annual income is greater than €22,880, and 3% if annual income is less. There is no exemption.

Yendred

Seeing as I won't make the deadline to make the monthly tax payments to the revenue because

1. Athlone revenue 'losing' my TR2.:(
2. Althlone revenue 'finding my TR2.:)
3. Athlone revenue taking one month to process said TR2.:mad:

So my question was moot, and I didn't even know it. Oh well.

On the other hand, is there any way I can take advantage of last year's 'empty' income?