Tax Efficiency: PAYE -Vs- Limited Company

Hobo85

Hi All,
Can anyone advise if its worth operating as say a Quantity Surveyor or Construction Manager under a limited company as opposed to PAYE in Ireland.

In the UK, once can operate as a limited company (one employee) in these types of positions. One takes a minimum wage salary each month, then takes a series of Directors Loan(s) which are paid back to the limited company at the end of the year. The director then draws a dividend which is then taxed accordingly (say 20% in UK). Provided the day rate is decent, this can be far more lucrative, at least in the short term, than staff positions in larger companies.

I'm led to believe its not so simple in Ireland and the tax system makes it difficult to emulate the above.

Thoughts/comments from those in-the-know appreciated. Thanks folks.

fankity flank

So are you in a position where a potential employer is giving you the option to be either a salaried (PAYE) employee, or a contractor invoicing them from a limited company?

If so, and assuming the fees are substantial enough, then the preferred option would always be the contractor providing services through their own company.

The main reasons for this would be;

1. Ability to claim expenses that would otherwise not be tax deductible as an employee
2. Flexibility in timing of salary to optimise use of lower rate tax bands
3. Possibility of hiring spouse or other as an employee (assuming some duties performed)
4. Flexibility and greater scope for tax deductible pension contributions
5. Availability of Entrepreneur Relief and other CGT reliefs upon sale/disposal of company

In Ireland it would be rare for a director to take a dividend from their own company, as this is not a very tax efficient extraction of cash. Full tax at top rates apply to this income in the hands of the director, and the company cannot claim a tax deduction for these payments. Therefore salary would be the main cash extraction method, as this is a bona fide business expense.

The idea of taking a director loan mid year and paying back before year end is a false economy, and possibly in violation of Revenue PAYE and withholding tax guidelines.

But it still stands, given the option, operation through a limited company is almost always preferable from a tax perspective.

mogilvie

Further to Fankity Flank, there are other considerations. Operation of a limited company does carry overheads, I'll list some annual costs in general terms:
1) Incorporation ~ 400
2) Annual returns ~500-800
3) Payroll ~ free to 250 depending on needs
4) Accounting software ~ 300
5) Insurances ~ depends.

Your equivalent salary needs to be large enough to offset the additional costs, and additional administration, that you're going to incur as a limited company.

I run two companies. One is trading as a consulting mechanical engineer, in construction, so a similar sector. In my line of work my clients ask to see your professional indemnity insurance, you'll also need public liability insurance. I have to do all CPD training myself. I have to pay professional memberships from my company, as an regular employee in a engineering firm that would normally be covered by the employer. If i get ill I don't get paid. If you work consistently for one client then that is deemed to be your place of work, so no transport related expenses for that. PRSI entitlements are limited. Your annual leave needs to be self funded. Public holidays are also self funded.

I would say you need to look at your long term plan. Pension deductions are good, but you need to be generating enough income that you can afford to load that into a pension and tuck it away for a long time. If you're working intense contracts, then taking time off between, then the flexibility to manage your monthly income to minimise taxes is also worthwhile. If you suspect that you might be heading off to other countries, then accumulating PRSI credits is also not a bit priority, so being an S class director lets you keep more money in the company.

Hobo85

Thanks Fankity Flant & Mogilvie.

Some valid points raised. I think in essences its very similar to the UK system, which was what I had assumed. Others told me a different story. Very little difference based on your commentary.

Like Mogilvie, I also operate under a ltd company in the UK. The IR35 (ltd company employees, effectively operating in staff positions) has not yet impacted the private sector, but has impacted the public sector.

Self employment (through limited company) is very common in London. Its the only way to get a few £ together in the short term. I did 5 years as staff and struggled to get by. I've done the past two as limited company, with all the overheads listed above, and have still faired-off substantially better. Its something I'd like to do (if the day rates) were good enough, when I return to Ireland.

The way property prices are rising, I think it would be the quickest option to saved the necessary deposit, then switch to PAYE role to secure the mortgage!

Rip-off-Ireland, here I come!

Cheers

mogilvie

Hobo85 wrote: »

Like Mogilvie, I also operate under a ltd company in the UK. The IR35 (ltd company employees, effectively operating in staff positions) has not yet impacted the private sector, but has impacted the public sector.

I was auto cad technician with a ltd company in London in early 2000's, when the disguised employment laws started appearing.
There is a similar test in Ireland (https://www.revenue.ie/en/employing-people/becoming-an-employer-and-ongoing-obligations/guide-to-pay-as-you-earn-paye/determining-the-employment-status-of-an-individual.aspx). Of course, it depends on the nature of the contracts you take on.
The biggest difference is the treatment of dividends. In the UK directors dividends were taxed at a lower rate. That isn't the case in Ireland. Having done limited companies in both countries I can say that there is more incentive in the UK.
WRT to a mortgage, being self employed, you're going to need around 3 years of trading records and Revenue tax clearance certs.

Hobo85

What sort of expenses can be claimed in Ireland if working as a limited company? Can you claim subsistence for example?

Jim2007

Hobo85 wrote: »

H
In the UK, once can operate as a limited company (one employee) in these types of positions. One takes a minimum wage salary each month, then takes a series of Directors Loan(s) which are paid back to the limited company at the end of the year. The director then draws a dividend which is then taxed accordingly (say 20% in UK). Provided the day rate is decent, this can be far more lucrative, at least in the short term, than staff positions in larger companies.

Out of date information, see the Rangers FC ruling and the HMS Revenue Code of Practice beginning April 2019. It is estimated about 50K of tax payers are about to get a financial shock in the form additional tax demands - for some BREXIT will be the least of their worries!

fankity flank

Hobo85 wrote: »

What sort of expenses can be claimed in Ireland if working as a limited company? Can you claim subsistence for example?

The benefit of a limited company (versus operating as a sole trader), is that you can claim mileage and subsistence rates from the company.

These payments can be taken as direct reimbursements to you personally, and are not subject to tax in your hands.

If you travel a lot for work it can be quite a useful and tax efficient way to extract cash from the company.

Quite a few restrictions in place, here's a link to the Revenue guidelines

https://www.revenue.ie/en/employing-people/employee-expenses/travel-and-subsistence/index.aspx

mogilvie

Hobo85 wrote: »

What sort of expenses can be claimed in Ireland if working as a limited company? Can you claim subsistence for example?

You can claim travel and expenses, but the criteria is quite strict around the "employees normal place of work". See summary here: https://fenero.ie/concerns-over-revenues-clarifications-on-travel-and-subsistence-expenses-to-contractors-in-tax-briefing-0313

If you're travelling a lot then you can claim day rates and overnight rates according to the civil service schedule, or as receipted. https://www.revenue.ie/en/employing-people/employee-expenses/travel-and-subsistence/civil-service-rates.aspx

Obvious business related expenses, website, accounting packages, payroll packages, stationary, insurances.

Home office expenses need to be justifiable. However, it can complicate capital gains taxes on primary residences. I personally, do not claim home office expenses, even though my business is actually based at home, with distributed staff and freelancers. I have dedicated space, servers, multiple workstations, plotters/printers etc.

Flat rate expenses can be claimed, but to be honest, they're minor in my profession. https://www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/documents/flat-rate-expenses.pdf

I do claim professional memberships, as they are essential and related to my business. But that's the test. https://www.revenue.ie/en/employing-people/benefit-in-kind-for-employers/other-benefits/examinations-courses-and-professional-subscriptions.aspx

If you're looking at a limited company as means to minimise your annual tax liability, then it is a lot of work for relatively little benefit (depending on your contracts) . On the other hand if you are looking to hire staff, and grow a trading business, then you might as well set yourself up in the right way.

Regards,
Mark
https://www.parolla.ie

mogilvie

mogilvie wrote: »

You can claim travel and expenses, but the criteria is quite strict around the "employees normal place of work". See summary here: https://fenero.ie/concerns-over-revenues-clarifications-on-travel-and-subsistence-expenses-to-contractors-in-tax-briefing-0313

If you're travelling a lot then you can claim day rates and overnight rates according to the civil service schedule, or as receipted. https://www.revenue.ie/en/employing-people/employee-expenses/travel-and-subsistence/civil-service-rates.aspx

Obvious business related expenses, website, accounting packages, payroll packages, stationary, insurances.

Home office expenses need to be justifiable. However, it can complicate capital gains taxes on primary residences. I personally, do not claim home office expenses, even though my business is actually based at home, with distributed staff and freelancers. I have dedicated space, servers, multiple workstations, plotters/printers etc.

Flat rate expenses can be claimed, but to be honest, they're minor in my profession. https://www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/documents/flat-rate-expenses.pdf

I do claim professional memberships, as they are essential and related to my business. But that's the test. https://www.revenue.ie/en/employing-people/benefit-in-kind-for-employers/other-benefits/examinations-courses-and-professional-subscriptions.aspx

If you're looking at a limited company as means to minimise your annual tax liability, then it is a lot of work for relatively little benefit (depending on your contracts) . On the other hand if you are looking to hire staff, and grow a trading business, then you might as well set yourself up in the right way.

Regards,
Mark
https://www.parolla.ie

Let's say you are single and if you set up a limited company in a home but then have a regular company you go to work at.

Is it worth your while going limited in this instance as are able to claim that much expenses.

tanit

Just a quick add up to the information coming out in this thread (it is very good by the way): If you create a company in your PPR (Private Personal Residence) and you claim expenses through your company accounts relating to the running of the business (a certain % of the house is dedicated to the business office and you claim electricity, gas, heating, etc), that will affect the use of the PPR relief if and when you sell that house in the future. So basically the immediate relief that you get on those expenses could lead to a potentially higher CGT liability in the future, depending of whether the house increases in value or not and by how much. That should be another factor that you need to consider if going for an LTD type of business or for a PAYE type of business (in the latter if you work from home, you have some Working from home reliefs, they are not huge money but working from this way does not affect the PPR relief in future CGT calculations)