A common problem that contractors can have is deciding what is the most tax efficient way to deal with end of the year profits in the company account. Here we’ll have a quick run through two of the main options out there: Bonus or dividends.
Let’s consider the following example:
- There is a €100,000 pre-tax profit sitting in your company account at year end.
- You are operating under a private limited company and you’re an Irish tax resident company and you’ve also availed of all your personal tax credits (i.e. PAYE).
- You have exceeded the lower rate of tax (20%) in your annual salary.
- You are the sole shareholder of the company.
So your company has done well this year, and there are €100,000 pre-tax profits sitting in your account (We know €100,000 may be slightly fantastical, but it makes the maths easier.) But which option should you take?
So, either a “nice big ol’ pat on the back” bonus for yourself or issue yourself dividends. When you’re the sole proprietor of the company, they’re essentially the same thing. All that really matters to you is how to keep as much of that €100k when transferring it from company account to your back pocket. Let’s consider the numbers.
While there of course individual issues, a general statement can be made that the effective rate of tax on dividends is just over 60% (60.625% to be precise) and the effective rate for a bonus is around 55%. Instead of going through the maths in blog form, we’ll do it table style – giving you a quick and simple account to explain it. The 2nd column illustrates what you get if you pay yourself a bonus and the 3rd column is if you pay yourself dividends.
|Your company’s pre-tax profits:||€100,000||€100,000|
|Less your bonus:||(€100,000)||(€0)|
|Corporation Tax @ 12.5%:||(€0)||(€12,500)|
|Income tax on bonus @ 55%*||(€55,000)||(€0)|
|Income tax on dividends** @ 55%||(€0)||(€48,125)|
*Income tax is a culmination of taxable income at 41% (upper income tax band) + 10% (PSRI) + 4% (USC)
**Company is eligible for dividends withholding tax exemption in this case as an Irish tax resident company
When looking at it this way it’s evident to see the logical option is to pay yourself a nice big fat bonus for the year end and enjoy an extra €5,625. But while this is generally the case, it isn’t always. In order to make this decision, the company’s tax liabilities would have to be assessed on a personal case basis something we cannot do in a blog piece. However, we’re nice and like helping our customers. The next step is for you to get in touch.
We’ll have more pieces like this coming out in the coming weeks like alternatives to the above options and other methods of tax efficient spending. Be sure to subscribe to the blog not to miss out on these!
Have you experienced any problems when trying to operate a company in a tax efficient way? Leave a comment or get in touch, we want to hear about them.
Disclaimer: The above does not constitute legal or accounting tax advice. While we have taken care to present as informed a piece as possible the above is a generalised statement and tax liabilities are assessed on a case by case basis. Neither Bullet nor the author of this piece will reimburse companies or individual for losses incurred due to misuse of information found in this blog. Ultimately any action taken based on the information presented above is the responsibility of the reader.