Profit from Limited company

jimmurt

Hi,

I'm trying to get my head around what a limited company pays in taxes and what taxes the owners are liable to.

For example, if a limited company had one employee and that employee did a contract for a customer for E130,000. The Ltd. pays the employee E30,000 and so is left with E100,000 profit. They then pay 12.5% corportate tax right?

This leaves them with E87,500 left. Can the owners (let'e say there is 2 with 50% stake each) just didvide up what is left as dividend or do they have to pay full PAYE, PRSI and universal social charge on this amount?

Alan Shore

jimmurt wrote: »

Hi,

I'm trying to get my head around what a limited company pays in taxes and what taxes the owners are liable to.

For example, if a limited company had one employee and that employee did a contract for a customer for E130,000. The Ltd. pays the employee E30,000 and so is left with E100,000 profit. They then pay 12.5% corportate tax right?

This leaves them with E87,500 left. Can the owners (let'e say there is 2 with 50% stake each) just didvide up what is left as dividend or do they have to pay full PAYE, PRSI and universal social charge on this amount?

If the company pays a dividend out to the shareholders and they are subject to tax in Ireland then it withholds 20% dividend withholding tax and they will be subject to income tax PRSI and USC on the dividend with a credit for the tax withheld so if they are high rate taxpayers 52%.

jimmurt

Thanks for the reply.

I read on other forums that ITcontractors set up Ltd companies rather than use an umbrella group as it saves money.

How are they saving money if this is the case? They still have to pay all the tax a salaried employee does, along with the dividend tax and corporation tax?

ImDave

jimmurt wrote: »

Thanks for the reply.

I read on other forums that ITcontractors set up Ltd companies rather than use an umbrella group as it saves money.

How are they saving money if this is the case? They still have to pay all the tax a salaried employee does, along with the dividend tax and corporation tax?

Normally dividend tax and corporation tax aren't issues for IT contractors in a limited company or umbrella company as you won't keep retained earnings in the company, which is what you pay CT on. If you have income of say €40,000, pay yourself a wage and expenses of €40k also. Then you just pay income tax as usual.

relaxed

Alan Shore wrote: »

If the company pays a dividend out to the shareholders and they are subject to tax in Ireland then it withholds 20% dividend withholding tax and they will be subject to income tax PRSI and USC on the dividend with a credit for the tax withheld so if they are high rate taxpayers 52%.

My understanding is you pay 33% tax on the dividend, so 12.5% comes off the top, effectively you pay about 41% tax.

Once you hit a certain level limited company and withdraw dividends is the way to go, if you are on the lower rate of Income tax then it might not be worth it.

You can also leave the 87500 in the company and use it to invest in other projects.

TheChizler

I'm trying to get my head around my own limited company, haven't got to grips with it before now as we're nowhere near profit making yet, and I do have an accountant to do this properly, but it's profit after costs at the end of year that you get taxed on isn't it? After rent, utilities, etc. unless your company had none of these in this simplified example.

jimmurt

Thanks for the info.

hfallada

I am pretty sure you dont pay any corporation tax for the first 3 years of a limited company as the government wants to encourage entrepreneurship etc. Remember if you leave money in the ltd company you pay no income tax. So if you are taxed at 50% but liquidate the companies assets you only get taxed at CGT of 33%( going to 37% soon, but hopefully lower in the future so you could wait until retirement).

After your 3 years corporation tax free period, there are other ways to avoid corporation tax but are complicated and involve off shore companies

srsly78

As a "service company" you would not qualify for the corp tax exemption.

OP - the answer is very simple. Do not make any profit, give yourself bonus wages in such a way as to reduce company profit to zero. Then there is no corp tax to pay. In theory you can expense lots of things and gain advantage that way, but the revenue is cracking down on spurious claims.

In the UK dividends are very efficient tax-wise. Although many of our regulations in Ireland are similar to the UK, dividends are treated very differently here. There is no tax advantage to taking dividends instead of bonus here - it just adds extra paperwork.

Note that most of the advice on the internet is about contractors in the UK.... don't get confused.

jimmurt

srsly78 wrote: »

As a "service company" you would not qualify for the corp tax exemption.

OP - the answer is very simple. Do not make any profit, give yourself bonus wages in such a way as to reduce company profit to zero. Then there is no corp tax to pay. In theory you can expense lots of things and gain advantage that way, but the revenue is cracking down on spurious claims.

In the UK dividends are very efficient tax-wise. Although many of our regulations in Ireland are similar to the UK, dividends are treated very differently here. There is no tax advantage to taking dividends instead of bonus here - it just adds extra paperwork.

Note that most of the advice on the internet is about contractors in the UK.... don't get confused.

Thanks for the reply. I'm beginning to see that the whole point is not to take dividends but to pay for as much as possible throught the company as expenses. Cars, food, phone bills etc.

BTW what taxes are there on bonuses?

srsly78

The same as any other normal income really. The only exceptional types of income are things like dividends and deposit interest (handled via DIRT and DWT). For all "normal" income you just apply your taxcredits and cutoff bands as usual. For most people (assumption = any bonus income is subject to marginal rate) this means paying the full whack of usc+prsi+income tax on it. For self-employed people earning over e100k there is an extra couple of percent added on for good measure.