One of the questions we get asked is, “Will I pay less tax if I am a Limited Company?”. Limited Company tax is an important aspect of starting a business and deciding which structure to choose, Sole Trader or Limited Company? Or if you are already a Sole Trader and want to know if changing to a Limited Company will lower taxes.
This article explores the tax benefits of running a Limited Company in Ireland versus a Sole Trader. We will cover the deductions, allowances, and reduced tax rates available to Irish Limited Companies and how they can help business owners lower their tax liabilities.
How much tax does a Limited Company pay in Ireland?
Ireland has two tax rates: 12.5% for trading income and 25% for expected trades and non-trading income.
If your business involves professional services, you may also be subject to an additional tax known as the ‘Close Company Surcharge,’ which calculates to an effective corporation tax rate of 20%.
It’s important to note that non-Irish resident directors who establish an Irish company aren’t automatically entitled to Irish tax registration. The Irish company may require tax registration in the country where it’s managed and controlled. For further information, we recommend consulting with your accountant.
Difference between Corporation Tax and Income Tax
Corporation Tax is a tax paid on company profits, and Income Tax is a tax paid on Sole Trader profits.
In Ireland, regular trading companies must pay Corporation Tax of 12.5% on their tax-adjusted profits. Sole Traders’Traders’ income tax rate will be determined by their individual circumstances and personal tax rate band, with rates of either 20% or 40%.
Notably, a company director can take a salary to pay themselves, which is a tax-deductible business expense. A company director’s salary will be subject to Income Tax like Sole Traders.
Take-home pay for directors vs Sole Traders
Sole Traders are taxed on the entire profits earned in the year, and if an individual is on the higher tax rate could be paying as high as 55% tax on earnings.
With a company, it is taxed at 12.5% on its profits. However, the company’s profits do not personally belong to the shareholders and directors. The after-tax earnings will remain in the company, and the directors can decide how to spend or invest the profits further. For the directors to get paid by the company, payroll can be agreed on and taken.
Directors of companies and sole traders pay payroll taxes the same way. But having a company lets you control the amount of payroll taken, which helps manage personal taxes paid. This is one of the main pros of having a company in Ireland.
Example of the tax differences between a Sole Trader and a company director
- Lucy is a Sole Trader with profits of €90,000. She will pay tax on all her earning minus expenses, which in this case equals €80,000.
- Joe is the director of a Limited Company who has company profits of €90,000 and takes an employee’s salary of €30,000.
- The combined taxes on his employee’s salary – including PAYE, USC, and PRSI – comes to about 16%.
- He then pays less tax on company profits minus expenses and salary, in this case, €50,000 taxed at 12.5% corporation tax.
| Lucy Sole Trader | Joe Limited Company | |
| Turnover | €90,000 | €90,000 |
| Expenses – e.g. rent, light, heat, etc | €10,000 | €10,000 |
| Gross Salary – Limited Company | – | €30,000 |
| Net Salary* | – | €25,388 |
| Corporation Tax | €6,250 | |
| Personal Tax on Wages | €28,901 | €5,078 |
| Total Tax | €28,901 | €11,328 |
| Note: the taxable profit for the sole trader is deemed salary | ||
| Drawings i.e. salary for a Sole Trader. (Total of what remains of your turnover after expenses) | €80,000 | – |
| Net Drawings* | €51,099 | – |
| Remaining turnover after 12.5% Corporation Tax on profits in the Limited Company | – | €43,750 |
| Net Income for the individual | €51,099 in net drawings | €25,388 in net salary for the director |
| Net Income for the business | – | €43, 750 in profit for the business |
Ways to pay less Limited Company tax vs Sole Trader tax
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Directors' salary
A salary is a fixed annual payment to an employee or director at regular intervals, e.g., weekly or monthly. The company decides the payment amount. So, if a director decides to take a salary, they can pay an amount that falls below the higher income tax rate.
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Tax-free vouchers
A director who takes a salary would also be entitled to a €1,000 tax-free gift voucher per year. In contrast, a Sole Trader is not entitled to this benefit.
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Salary planning
With a company set-up, you can employ family members. These individuals would then have their own tax rates, bands, and allowances. Earnings of a company split between a few adult employees would likely work out more tax beneficial rather than the total amount being taken and taxed by one individual.
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Director's fees
Directors can receive payment for activities relating solely to specific director duties and, for example, attending meetings if they are not an employee of the company. However, they would also need to do this for other companies; otherwise, it may be best to put these payments through as director salaries. This type of income would also be declared a sole trade income in their annual director's income tax return.
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Dividends
Dividends are regular payments (typically once a year) by a company to its shareholders from its profits or reserves. It's important to note that a director can only take dividends if they are also a shareholder in the company.
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Claim expenses
For example, any employees or directors that work away from their normal place of work can be paid tax-free travel and subsistence payments. The length of time spent away from the normal place of work determines the tax-free amount. In addition, a company may pay a certain percentage of the cost of every business journey taken in a private vehicle, based on the distance travelled.
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Make pension contributions
It can be tax efficient for a Limited Company to contribute to a pension for an employee or director through an executive pension or a small, self-administered pension (SSAP). The company and its directors can enjoy tax benefits from employer contributions to pension schemes. Payments made by the company into the directors’ pension fund are allowable as a deduction against trading profits which are subject to tax. There is no tax on this benefit for the director.
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Kinore, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland and the UK.
