Company Bonus - Shares or AVC's

mel123

Hi
The company is a good company to have shares in, but what is the best option money wise do with your company bonus?

If anyone can explain the pro's and con's to a dummy i would be grateful :-)

Jim2007

The down side of shares would be that both your job and wealth is subject to the same risk factor

mel123

Good point to consider, thanks

delta_bravo

Also no tax relief on shares but there is on avcs. If you don't think you will need the money until retirement I'd go avc

Also if your company give you a share purchase discount you need to pay tax on this benefit

OEP

delta_bravo wrote: »

Also no tax relief on shares but there is on avcs. If you don't think you will need the money until retirement I'd go avc

Also if your company give you a share purchase discount you need to pay tax on this benefit

There is tax relief on shares if done through the proper scheme, or whatever it's called. You don't pay income tax if you hold for 3 years, maximum of 12700 per year

OEP

mel123 wrote: »

Hi
The company is a good company to have shares in, but what is the best option money wise do with your company bonus?

If anyone can explain the pro's and con's to a dummy i would be grateful :-)

Jim makes a good point about having money and your job tied to the company - so depends on how stable your job and company are.

For me the pro's of shares are you get the income tax relief, but only have to wait three years for access to the money. You can max out pension contributions through your salary but using your bonus to purchase shares is a tax efficient way of getting money in a much shorter time frame.

Buddy Bubs

Diversify into investing in other companies through your pension, taking the superior tax relief along the way. Can be a very volatile investment strategy putting all your money in one company. Probably called punting or gambling rather than investing.

PhilOssophy

Buddy Bubs wrote: »

Diversify into investing in other companies through your pension, taking the superior tax relief along the way. Can be a very volatile investment strategy putting all your money in one company. Probably called punting or gambling rather than investing.

Agree with this. I don't 100% know the rules but there's some rule about being taxed on holding shares every 8 years even though you don't sell them. Anybody able to provide info on this?

The J Stands for Jay

OEP wrote: »

There is tax relief on shares if done through the proper scheme, or whatever it's called. You don't pay income tax if you hold for 3 years, maximum of 12700 per year

Just remember to pay the tax on the dividends, and CGT on disposal.

The J Stands for Jay

PhilOssophy wrote: »

Agree with this. I don't 100% know the rules but there's some rule about being taxed on holding shares every 8 years even though you don't sell them. Anybody able to provide info on this?

No, that applies to ETFs and life assurance investment funds.

PhilOssophy

McGaggs wrote: »

No, that applies to ETFs and life assurance investment funds.

Sorry, my mistake.

The J Stands for Jay

PhilOssophy wrote: »

Sorry, my mistake.

Easy mistake with the crazy approach to taxing investment here.

PhilOssophy

McGaggs wrote: »

Easy mistake with the crazy approach to taxing investment here.

Agree - I have always said that there should be much higher thresholds, you have paid tax on the income once, why should you have to pay it again just because you've got some luck with it.

I don't think people should be able to make hundreds of thousands tax free, but most investors are small time people working away and trying to make a few bob through an investment.

OEP

PhilOssophy wrote: »

Agree - I have always said that there should be much higher thresholds, you have paid tax on the income once, why should you have to pay it again just because you've got some luck with it.

I don't think people should be able to make hundreds of thousands tax free, but most investors are small time people working away and trying to make a few bob through an investment.

Yes, even like the UK have 11k exempt from CGT. This makes a big difference to small time investors - 11k a year on top of your salary is a nice little earner.

This will never get votes as people see this a benefitting rich people

The J Stands for Jay

OEP wrote: »

Yes, even like the UK have 11k exempt from CGT. This makes a big difference to small time investors - 11k a year on top of your salary is a nice little earner.

This will never get votes as people see this a benefitting rich people

Our equivalent? €1,270. IEP£1,000. That's how long it's stayed the same. There be been a few tax limits that were supposed to be increased on line with inflation, not sure if this was one of them, but the government stopped indexation around 10 years ago.

This has probably contributed to the lack of an investment culture in Ireland. We have loads of money on deposit that earns nothing.

SureYWouldntYa

PhilOssophy wrote: »

Agree - I have always said that there should be much higher thresholds, you have paid tax on the income once, why should you have to pay it again just because you've got some luck with it.

I don't think people should be able to make hundreds of thousands tax free, but most investors are small time people working away and trying to make a few bob through an investment.

The logic is to provide a tax boost to the Revenue receipts since upon disposal of the fund you'll pay on the gain anyway, that's why they do it

You'll have the tax bill at the end anyway so why not pay some of it now they say

If you have to sell any of your fund to pay this tax bill then it will reduce your capital appreciation further down the line which is why it's unfair

dennyk

As others have said, investing in your own employer's stock is risky. You already have significant exposure to the financial success of your employer in that all of your potential future income for the next indefinite period depends on it; adding more by purchasing shares of their stock just increases your risk. (And honestly, buying a bunch of shares of any one single company isn't the most sound financial strategy in general; diversification is the key to long-term investments. Day trading individual shares is basically just playing the lotto with slightly better odds.)

The exception is if your employer offers a discounted employee share scheme; in that case it might make financial sense to purchase discounted shares through that scheme, then sell them off for market value immediately for a profit and reinvest those returns (minus your CGT, of course) into a diversified portfolio. It'll depend on the exact terms of any such scheme and on any restrictions on selling those shares, though; e.g. if your employer only allows trading by employees during certain windows, you could end up stuck with shares that are worth less than the discounted price you paid by the time the next window comes around.

OEP

dennyk wrote: »

As others have said, investing in your own employer's stock is risky. You already have significant exposure to the financial success of your employer in that all of your potential future income for the next indefinite period depends on it; adding more by purchasing shares of their stock just increases your risk. (And honestly, buying a bunch of shares of any one single company isn't the most sound financial strategy in general; diversification is the key to long-term investments. Day trading individual shares is basically just playing the lotto with slightly better odds.)

The exception is if your employer offers a discounted employee share scheme; in that case it might make financial sense to purchase discounted shares through that scheme, then sell them off for market value immediately for a profit and reinvest those returns (minus your CGT, of course) into a diversified portfolio. It'll depend on the exact terms of any such scheme and on any restrictions on selling those shares, though; e.g. if your employer only allows trading by employees during certain windows, you could end up stuck with shares that are worth less than the discounted price you paid by the time the next window comes around.

It is likely that they can buy the shares before tax, so this is a significant plus for buying them

colm_c

OEP wrote: »

It is likely that they can buy the shares before tax, so this is a significant plus for buying them

You always have to pay tax, gross or net amount doesn't matter, tax man always gets his pound of flesh.

If your company 'gives' you shares as payment, that is income, so you pay income tax on the value of the shares, so you will have a large tax big in your regular payslip

If you get them to the value of net salary, then you have already paid the tax, but you get less shares.

If you get them for 15% less, then you also pay tax on the 15% gain, and more if they rise in value.

OP an AVC is better from a tax perspective, since it is the gross amount, and you don't pay tax immediately.

But it is a long time to tie up cash if your pension is pretty healthy already.

The J Stands for Jay

colm_c wrote: »

You always have to pay tax, gross or net amount doesn't matter, tax man always gets his pound of flesh.

If your company 'gives' you shares as payment, that is income, so you pay income tax on the value of the shares, so you will have a large tax big in your regular payslip

If you get them to the value of net salary, then you have already paid the tax, but you get less shares.

If you get them for 15% less, then you also pay tax on the 15% gain, and more if they rise in value.

OP an AVC is better from a tax perspective, since it is the gross amount, and you don't pay tax immediately.

But it is a long time to tie up cash if your pension is pretty healthy already.

It depends on the type of the scheme, and what has been agreed with Revenue. I've taken part in two different types. One where you save a monthly amount from your post tax salary for 3 or 5 years and then can buy shares for a discounted price at the end of the term. You are taxed on any gain when the option is excercised (tax paid through payroll). After that, the shares are taxed as normal. Another one, you pay a monthly amount from post tax income which is used to our base shares. The employer then gives so many extra shares for each one bought (different employers give different amounts). Shares can't be sold for 2 years. If sold in the 3rd year, tax is payable on the purchase value of the free shares. If held for 3 years, no tax is due on the free shares. Income tax on dividends and CGT on disposal is payable as normal.

There are other schemes, with different tax rules, but I've never had an employer who provided them.

OEP

colm_c wrote: »

You always have to pay tax, gross or net amount doesn't matter, tax man always gets his pound of flesh.

If your company 'gives' you shares as payment, that is income, so you pay income tax on the value of the shares, so you will have a large tax big in your regular payslip

If you get them to the value of net salary, then you have already paid the tax, but you get less shares.

If you get them for 15% less, then you also pay tax on the 15% gain, and more if they rise in value.

OP an AVC is better from a tax perspective, since it is the gross amount, and you don't pay tax immediately.

But it is a long time to tie up cash if your pension is pretty healthy already.

McGaggs pretty much covers it but it depends on the scheme. I take my bonus in stock, as much as Revenue allows anyway, and I don't pay income tax on it if I hold it for three years. I do pay USC and PRSI, and CGT if the share price increases from when I receive the stock to when I sell it, only on the increase obviously.

I also forgo salary monthly pre tax, and stock is purchased at the end of the year. Same applies here that I must hold for three years if I don't want to pay income tax.

The sum of your bonus and salary forgone is capped at 12700 per year, as in you can't buy more stock than that value. There are also some other limits.

So you're essentially getting the stock at a 40% discount compared to buying with after tax income.