From paying wages to claiming credits, there are ways to cut your tax bill while maximising income.
I often think dentists and accountants have many common characteristics.
The would-be patient harbours a certain dread of attending their clinician. Attendance is put off for as long as possible, and the financial extraction manifesting in the tax bill registers even more painful than the dental equivalent.
Having had an examination, prognosis and treatment, the patient often leaves the premises feeling regret that he or she had not taken preventative action.
With that in mind, don’t blame your dentist for the current state of your gnashers nor your accountant for the current state of your tax affairs. In reality, there is little either your dentist or your accountant can do to fix the past, but good advice taken on board now will prevent pain in the future.
Ultimately, tax is a function of your profits. As a starting point, let’s get the ground rules covered. Make no profits, pay no tax. If you really do want to pay no tax, then aim to earn as little as possible and below about €13,000 a year, at which point you should manage to avoid income tax and USC from self-employment and PAYE income. Make a heap of profit and expect a chunky tax bill. Make more profit than last year and expect your tax bill to increase.
Controlling Your Personal Expenditure
As a sole trader, controlling personal expenditure gives the capacity to increase tax-deductible expenditure on day-to-day expenses and capital expenditure. It is particularly difficult to tackle high tax bills where high business profits and matched with high personal drawings and non-tax-deductible loan repayments.
Making Use Of Joint Assessment
Joint assessment allows for a partial sharing of tax bands and tax credits for married persons and persons in civil partnership and is of use where one spouse earns more than €36,800 a year and the other spouse less than that amount where the sharing of tax bands results in a 20% tax saving worth up to €1,800 a year and is also is of use where one spouse is not using up their tax credits — the saving here could be worth up to a further €1,650 per annum.
Maximising Tax Bands And Tax Credits In Family Businesses
Where multiple persons are involved in running the business, it makes sense from a tax perspective that those involved are remunerated rather than concentrating the profits entirely on the business owner.
Take for instance a farmer whose wife and two adult children assist in the running of the farm, with family farm income of €60,000 a year. Were the profits to be concentrated solely on the farm owner, the tax outcome would be about €14,300 a year and even higher were it not for joint assessment.
Splitting out the income among the four persons involved in running the farm would see the tax bill potentially reduced to below €2,000 a year. The amount of income split amongst those involved in the business should be commensurate with their contributions.
Running A Business In Partnership Or Paying Wages
As an add-on feature to rewarding those involved in family businesses, due consideration should be given as to the mode in which their contribution is recognised. A choice between wages or partnership share of profits should be made and each has differing merits.
For instance, wages paid to subsidy employments including children of a sole trader farmer attract virtually no PRSI but equally virtually no PRSI benefits. Partnerships are useful in bringing along the next generation with a sense of common purpose and ‘buy-in’ but can be hard to untangle.
Investing Wisely In Your Expenditure
Some business expenditure qualifies for an immediate deduction from taxable profits. Other expenditure is seen as capital in nature and may be written off against profits over an eight-year period.
Yet more expenditure may qualify for 100% allowances in year one even though it is of a capital nature and finally, other expenditures will not qualify for any income tax deduction.
For example, a garage decides to buy the business premises next door to allow for extra tyre storage — this expenditure doesn’t qualify as tax-deductible for income tax, whereas investment in new tyre racking would.
Claim What Credits You’re Entitled To
The list of tax credits one can claim has been slimmed down over recent years, with the more common ones such as bin charges and trade union subs gone the way of the dodo.
However, there are some credits which are sometimes overlooked such as the home carer credit for taking care of an elderly person living with you or elderly relative living close by. It is worthwhile checking out a list of tax credits which might spark further enquiries if you feel they may be appropriate.
Consider Tax Exempt Income
There are some career choices and indeed farming choices which offer pretty handsome tax incentives. Income tax-exempt options include commercial forestry income and leased land income and outside of farming, options include the rent-a-room scheme and tax-exempt childcare services.
Incorporation
Where a business is generating excess profits above and beyond the personal income requirements of the business owner, then company incorporation should at least feature for consideration.
The principal advantage here is that excess profits retained in the company are taxed at rates as low as 12.5% compared to potentially 52% for the self-employed.
Making Use Of Tax Incentives
Tax incentives are offered as encouragements towards certain policies. The succession tax credit worth up to €5,000 a year for a farm partnership for up to five years is worth consideration if your family circumstances fit within that space. Other incentives include young trained farmer stock relief.
Consider Pension Payments
Payments made by self-employed persons into a qualifying pension scheme can attract tax relief at up to 40%, and better still a payment made in 2022 can be treated for tax purposes as a deduction against 2021 profits.
However, beware, if you can’t afford your tax bill then maybe you can’t afford pension payments as it takes €2.50 in pension payments to knock €1 off your tax bill.
As always, the best piece of advice remains to seek guidance from a tax adviser or accountant who can guide you through your own specific circumstances.
(Source – Irish Examiner – Farming – Kieran Coughlan – 28/06/2022)