Going Ltd. could cut your tax bill

Sole traders, have you ever wondered if you could reduce your tax bill by opening up a limited company instead?

The first question a trader needs to ask themselves here is whether or not they need all of the profits that their business generates in order to meet their day to day living expenses.

If, for example, they have decided that they need €40,000 to live every year but the business has started to make €60,000 a year, then forming a limited company could be well worth considering.

How much could they save? Sole traders pay tax on the profits their business earns in the tax year. So, taking the €60k figure, even if they only take €40k as drawings, they will still be taxed on the €60k profit that they make.

Depending on their personal circumstances, any profits above €35,300 are probably going to be taxed at the higher rate of tax which in this case would be likely to be 48.5 per cent. For a single person, the total tax bill here would be in the region of €18,043.

Now, let’s say they had decided to form a limited company. In this scenario, they are seen as an employee of the company.

The company pays them a wage every week/month and, like all other employees, the company deducts taxes from every pay cheque and pays them over to Revenue on a monthly/quarterly basis.

If the company’s profits were €60k and the owner took a salary of €40k, they would pay income taxes on the €40k and the company would pay tax on a profit of €20k at 12.5 per cent. Therefore, the total tax bill would be in the region of €10,843. The key here, however, is that the money has to stay in the company.

There are other things to consider too.

Setting up a limited company involves more paperwork and the filing of annual accounts with the Companies Registration Office each year, which is something a sole trader does not have to do.

On the other hand, trading through a company can offer attractive tax opportunities when it comes to a person’s pension.

Whatever the decision, it is important to talk through all available options with a professional.

TaxAssist Accountants has lots of experience in advising clients on the move from sole trader to a limited company and can take all the hassle out of the switch.

For a free consultation, contact Clive Aherne on Washington Street on 021-2427447 or Terry O’Donovan on 021-2427576 in Blackpool.