“Should I stay or should I go now? Should I stay or should I go now? If I go there will be trouble And if I stay it will be double. So come on and let me know” The Clash
It’s sunny but cold here in Tramore. A sun cream and woolly hat sort of day, when the seagulls will brave the elements if there’s a serious feed on offer. A couple of friends of mine are already done with their morning swim. When I enquired if they used wetsuits, I got a “don’t be ridiculous” disdainful look. They get some slagging about their dryrobes. But, if I had to get into the sea on a cold April day, I’d need 2 dryrobes, a hot water bottle, and 3 thermal vests when getting out. Hardy and mad. Can this be good for you? Is it good for your immune system? I don’t know and I won’t be finding out.
Some of this gang are off hiking in the Comeraghs for the Charlie Bird fundraiser this Saturday. Wallie from Dunhill is head sherpa, and he will make the route challenging. There’ll be plenty of tired bodies and giving out. I am off to run the Anne Valley 5-mile challenge. My son is running for the first time, and he wants me to give him €100 if he beats me. It’s a win-win for him seeing as I don’t get anything if I beat him!
Last week we spoke about Our hero Jeff when we first started working with an accountancy coach in the UK. We learned about the business journey and Jeff’s numbers. See here
This week we will talk about a meeting I had with Judy who was looking to transfer her business into a company. We will look at
- Judy’s background
- Salary & taxes in the company
- Pensions or an alternative
Judy is married to Paul, and they have two children. She has run her own engineering business since 2005. One child Rose is looking to come into the business. Paul has a good job earning €65000 per annum and has a pension. For the year ended 31 December 2021 Judy’s profit was €92000 and she had a tax liability of €33000. She made a pension payment of €29000 for 2021. She is 54 years old and works very hard, so would like to do less in the next few years. Judy only takes €800 per month from the business and has built up over €100000 in cash.
Company Taxes and salary
As you will know the corporate tax rate in Ireland on trading income is 12.5%. But for a professional services firm, it is closer to 20%. The increase is due to a surcharge on undistributed profits of the company. Judy’s net salary needs to be €800 net per month. A salary of €12000 would give her a monthly net income of €900
Let’s assume Judy set up a company from 1 January 2022 called J&R Ltd that has the same profits as in 2021 with €92000. Her corporation Tax liability would look like this
|Profit before salary||€92000|
|Less Judy salary||€12000|
|Net trading profit||€80000|
|Net cash in the company||€64000|
If you add payroll taxes of €1200 to the Corporation Tax liability the total tax cost is €17200. If you compare this to her 2021 tax liability of €33000 there is a saving of €15800 in 2022.
Pensions – Can she put in more?
As a sole trader the amount Judy can put into her pension and get tax relief on has limits. The limit is on age and profits subject to an annual cap of €115000. For 2021, as Judy is 54, she can put in 30% of her profit and get tax relief. When she is 55, she can put in 35% of her profits, so the older she gets the more she can put in. For more information on this see here
Being a company director, the amount she can put in will depend on her salary. She can fund up to 2/3rd of her final salary. If she has a small salary of €12000 then the max pension fund would pay an annual pension of €8000. Assuming a 4% return on a pension fund that would be a pension pot of €200000. Her existing pensions would come into the calculation. It would make sense for her to have a higher salary in the company if she wanted to fund a higher pension. On a salary of up to €27000 she would pay lower rate tax. Her net monthly salary would be €1810 so she could save €1000 per month. The effective tax rate of this salary is 19.56% so it would make sense for a higher salary as it would be cost-neutral. The company would get a deduction of 20% for the extra salary.
With a salary of €27000 a pension fund of 2/3rds would be €18000. With a 4% return that would give a pension pot of €450000. This would give plenty of scope to fund a company pension over the coming years. But is there another approach she could take?
Accumulate funds in the company
Rather than contribute to a company pension Judy decides to build up cash in the company. When she takes the higher salary, there will be about €50000 extra cash in the company per annum. Based on the same profits over the next 5 years, the cash will come to €250000. Judy decides to exit the company by passing shares onto Rose or by liquidating the company. If this exit was for the benefit of the trade, then the company could buy back her shares. The company would pay her the market value of her shares and, assuming that was €250000, she would pay CGT on it. Once she meets the conditions of Entrepreneurs Relief [ER] then her tax rate on the payment would be 10%. For more information on ER click
In this case, her net after-tax payment would be €225000. By saving €1000 per month for 5 years, she would have another €60000 to give her a total cash amount of €285000.
Getting Rose involved
If Judy sets up J&R Ltd, she could give Rose 10% of the shares at the outset. Rose would have an interest in the company by owning 10%. Then it would be up to Judy and Rose to set out a plan and a timeframe for when Rose would take over the business. She would have to work hard and show that she had an interest in looking after the business. Her starting salary would be low but would increase as she becomes more valuable to the business. If Judy was happy that Rose wanted to take over then she could exit and do the share buyback as suggested. Say there were 100 shares in issue and the company redeemed Judy’s 90 shares then there are only 10 shares left. In that case Rose owns those shares, so owns 100% of the company, and Judy gets paid for her 90 shares.
If it doesn’t work out with Rose and Judy still wants to exit, then she can liquidate the company and extract the cash. If done right Judy could get ER relief on the payment from the liquidator.
Costs of setting up and ongoing
Our cost for setting up the company is about €900 plus Vat. This includes a payment to a company formation agent of €250. We do all the paperwork and register the company for taxes. For more information on what we do to help you with your company formation see here. You can’t backdate a company. A company is set up from the date of incorporation. You would register it for taxes once you have the cert of incorporation and you will need the CRO number for that.
Ongoing costs would vary as that will depend on the work we have to do. But the cost will be more expensive than the sole trader accounts because
- company accounts will be in a set format with notes so take longer to prepare
- the company will have to file a corporation tax return and computations
- the company will have to file an annual return form B1 to the CRO
- the company will have to file a set of abridged accounts with the CRO
- Other requirements like meetings to comply with company law
Judy currently pays €1500 to her accountant, and I estimated our fees would be approx. €3000 plus Vat. We would always do a fee quote before doing any work, so the client knows what they will pay. What I would say is that this work must be right and on time, every time. You are dealing with Revenue and the CRO and there are extra costs in time and money if things are not correct.
As the song says “come one and let me know, should I stay or should I go”? What would I do? If profits were to stay the same or increase over the next few years I would go. I like the flexibility that a company brings and the tax efficiencies. Accumulating cash gives you more options to grow the company. Take on more staff, buy new equipment and look after the company owners too. More flexibility means more options and more clarity on taxes.
Interested in finding out if a company structure would be suitable for you? Call Deirdre on 051 396703 or start here