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CONTRACTORS: SAVE TAX USING A LIMITED COMPANY PENSION

  • Are you a contractor or thinking of changing from employee to contracting?
  • Maybe you are changing from Umbrella company to your own company – seeking full control of your earnings?
  • Wondering what will your net pay may be?
  • How can you reduce reduce your income tax?

Well here are three worked examples to illustrate your net pay could be and how you could save on tax by setting up a Limited Company, employing your spouse and using a Company Pension.

Your net salary will depend on a number of factors, the most significant being your daily fee rate earned and pension contribution.

Other factors include the level of expenses allowed and whether or not you can employ family members (e.g. to utilise tax credits and tax bands for familial staff/directors to increase your combined net pay).

In effect, any contribution to an efficiently managed company pension will reduce your tax bill by 52% of the contribution. In other words, for an effective sacrifice of €100 net pay you will have over €200 in a pension fund where growth is also tax free!

All below examples are reflective of the change from Budget 2016 to be effective from 01/01/2016 and assume that directors will be eligible to get the additional tax credit as a ‘self-employed’ person.

Read more on Tax Saving Tips for Contractors in Ireland

3 Worked Examples of How You Save Tax Using This Structure

 

Note the following is assumed in the examples below:
  • Assuming 46 working weeks i.e. taking 4 weeks of holidays and allowing for bank holidays
  • [In 2 examples] Assumes partner/spouse is not employed or receiving other sources of income.
  • Assumes allowable expenses @ 5% of turnover. (There may be additional expenses allowed). 
*Note that payments to spouse/partner would have to be legitimate for services they provide, for example, bookkeeping, administration, company secretarial services etc.

Example 1: You are a Project Manager on a Daily Rate of €370

  • €370 x 5 days x 46 Weeks = Gross Income of €85,100, expenses @ 5% = €4,255
  • If you pay your spouse as a director and bookkeeper, say €10,000, your gross salary would be €70,845

In this example, your total Gross pay would be €70,845. With no pension contribution, you will have a tax liability of €25,421 and receive net payment of €45,424. Your spouse/partner will also receive net pay of €9,150, having paid tax of €850.

By contributing to a pension, this will reduce your tax bill by almost 50% of the contribution. Therefore a contribution of €12,000 into a pension will reduce your tax liability to €19,461. This means that your net pay is reduced by only €6,040, having contributed €12,000 to your pension fund which will also grow tax free over the life of the pension.*

Similarly, a contribution of €24,000 into a pension will reduce your tax liability by €11,900. Your net pay is reduced by only €12,100, but you now have contributed €24,000 to your pension fund which will also grow tax free over the life of the pension.*

           €          €           €
GROSS PAY   70,845   70,845   70,845
Pension Contribution   0   12,000   24,000
Tax Payable   25,421   19,461   13,521
NET PAY Self 45,424   39,384   33,324
  Spouse 9,150   9,150   9,150
             
Pension Fund   0   12,000   24,000
             
Total Benefit   54,574   60,534   66,474
             
*Note: This would be in addition to the expenses claimed

Example 2 – You are a software engineer on a daily rate of €500

  • €500 x 5 days x 46 weeks = Gross Income €115,000
  • 5% is €5,750 in Expenses
  • If you pay your spouse as a director and bookkeeper, say €10,000, your gross salary would be €99,250

In this example, your total Gross pay would be €99,250. With no pension contribution, you will have a tax liability of €40,192 and receive net payment of €59,058. Your spouse/partner will again receive net pay of €9,150, having paid tax of €850.

By contributing to a pension, this will reduce your tax bill by 52% of the contribution. Therefore a contribution of €12,000 into a pension will reduce your tax liability to €33,952.  This means that your net pay is reduced by only €5,760, having contributed €12,000 to your pension fund which will also grow tax free over the life of the pension*.

  • [highlight style=”black”]You are better off by €6,240, prior to taking account of the growth of the pension fund.[/highlight]

Similarly, a contribution of €24,000 into a pension will reduce you your tax liability by €12,480. Your net pay is reduced by only €11,520, but you now have contributed €24,000 to your pension fund which will also grow tax free over the life of the pension*.

  • [highlight style=”black”]You are thus even better off by €12,480, prior to taking account of the growth of the pension fund.[/highlight]
            €           €          €
GROSS PAY   99,250   99,250   99,250
Pension Contribution   0   12,000   24,000
Tax Payable   40,192   33,952   27,712
NET PAY Self 59,058   53,298   47,538
  Spouse 9,150   9,150   9,150
             
Pension Fund   0   12,000   24,000
             
Total Benefit   68,208   74,448   80,688
             
Note: This would be in addition to the allowable expenses

Example 3 – You are a Technical Architect on a Daily Rate of €1,000

Note: In this example we will assume you are not employing a spouse
  • €1,000 x 5 days x 46 Weeks = Gross Income of €230,000, expenses @ 5% = €11,500
  • Gross Pay: €218,500

In this example, your total Gross pay would be €218,500. With no pension contribution, you will have a tax liability of €102,202 and receive net payment of €116,298.

By contributing to a pension, this will reduce your tax bill by 52% of the contribution. Therefore a contribution of €24,000 into a pension will reduce you your tax liability to €89,722. This means that your net pay is reduced by only €11,520 , having contributed €24,000 to your pension fund which will also grow tax free over the life of the pension*.

  • [highlight style=”black”]You are better off by €12,480, prior to taking account of the growth of the pension fund.[/highlight]

Similarly, a contribution of €48,000 into a pension will reduce your tax liability by €24,490. Your net pay is reduced by only €23,040, but you now have contributed €48,000 to your pension fund which will also grow tax free over the life of the pension.*

  • [highlight style=”black”]You are thus even better off by €24,490, prior to taking account of the growth of the pension fund.[/highlight]
         €         €         €
GROSS PAY   218,500   218,500   218,500
Pension Contribution   0   24,000   48,000
Tax Payable   102,202   89,722   77,242
NET PAY Self 116,298   104,778   93,258
             
             
Pension Fund   0   24,000   48,000
             
Total Benefit   116,298   128,778   141,258
             
Note: This would be in addition to the allowable expenses

Information provided by Liam Burns & Co.

Liam Burns & Co., being Chartered Tax Advisers and Chartered Certified Accountants can look after all of your accountancy and taxation requirements.

Fees are competitive at €120 per month plus VAT. This is tax deductible and therefore have a maximum net cost of €60 per month (from 01/01/2016).

With Liam Burns & Co., you can be guaranteed that your specific requirements are catered, guaranteeing that you are not only tax compliant, but tax efficient and maximising the use of your earnings.

As an all-round service, Liam can provide all your accountancy and taxation needs and provide professional advice not only in terms of your contracting business, but any other ‘side’ businesses that you may delve into now or in the future.

Get a FREE consultation for general advice in relation to the options for structuring your business, allowable expenses, Net pay, tax efficient pensions, filing deadlines and tax reliefs available.

Once you decide to go ahead, Liam will arrange to set up your company, register for taxes (Company and Individual) and address any other issues you may have.