After a year of working your fingers to the proverbial bone and trying to put a few bob aside, along comes the taxman in late October and snaffles it all away from you. Every self-employed tradesman in Ireland must know this feeling.
We’re all aware that tax has to be paid but most cannot get their head around how it works. Why is the tax bill so high, and how can the tax payable be minimised?
There’s not much point getting into the tedious details of tax cut-off rates and tax credits as most people will probably skip over it and hope for the best, but below are 10 simple ways to minimise your tax bill and maximise your net pay.
1. Claim Your Subsistence Expenses
If time is spent working away from the normal place of work, subsistence allowance can be paid to employees, or claimed by the owner or director, tax free up to certain rates. For example, these are the allowable subsistence expenses, effective from July 2015, when away from the normal workplace:
- More than five hours away = €14.01 per day
- More than 10 hours away = €33.61 per day
That means that if a tradesman is paying an employee additional money because the employee is away from the normal place of work, this can be paid without tax, which could range from €70 to €165 per week. Overnight stays attract even higher rates. This also applies to the tradesman themselves; typically it could be circa €5,000 tax free per year. It is important however to document all details.
2. Create your own Tax-Free Vouchers
These are permissible for business employees and also company directors. Taking a standard company with husband-and-wife directors, this would mean a voucher could be paid for up to €1,000 by the business, saving approximately €500 in income tax.
3. Use Subcontractors
Rather than hiring part-time or temporary employees and paying Employers PRSI of more than 10% on top of their wages, it might be a better option to use subcontractors. These are independent workers who can be paid on a contract or job-to-job basis. This cuts costs of holidays, bank holidays, and possibly redundancy in the longer term. However, individuals must be registered for income tax and fall into the category of a subcontractor rather than an employee. They must, for example, be free to carry out work for similar third parties.
4. Put your family on the payroll
Family members can be paid as directors or employees if employed by the business. Payment would have to be for services provided. Typically, administration services would be required and the family member should be paid through the payroll system to ensure the cost is correctly deducted against the tradesman’s income to minimise tax. Also, if a spouse has a low income level or does not have income in their own right, ensure you are Jointly Assessed to reduce your overall tax liability.
5. Consider converting to a Limited Company – if you’re operating as a Sole Trader or Partnership at present
This will allow you to avail of the lower tax rate applicable to companies, of 12.5%. Profits above the salaries required by business owners can be left in the company, paying tax at just 12.5%, rather than up to 50% as a sole trader. There are other advantages of doing so, including:
Retirement Relief: If money or assets are built up within a company structure, individuals more than 55 years of age can avail of this relief allowing them to withdraw up to €750,000 tax free – meaning no Income Tax or Capital Gains Tax – from the company. Although, certain conditions apply, tax planning can ensure you will qualify.
Termination Payments: Directors may be eligible to receive a tax-free payment of more than €20,000 in certain circumstances.
6. Pay into a Pension
Individual and company contributions to pensions may be deducted before tax. For example, if you are taxable at the higher rates of tax and you contribute say, €20,000 to a pension, you will save approximately €10,000 on your tax bill for the year. However, pension contributions are restricted for sole traders. For those operating through a company, the options are less restrictive and more favourable when pension age is reached, yet another reason to consider converting to a company.
7. Avoid Penalties or Late Surcharges and Interest
Stay on top of your filing or hire a competent accountant or bookkeeper to ensure VAT, RCT, other taxes and Companies Office Returns are filed and paid in good time. Have some of these payments set up on Direct Debit, thereby reducing the frequency of filing tax returns and reducing the chance of late filing surcharges. Such costs can be easily minimised or avoided.
8. Apply for, and use, a Business Credit Card
Obviously, copies of all receipts and expenses should be kept but it is not unusual to lose track of some records, especially when under pressure to meet deadlines. By using a business credit card for business purposes, all expenses are recorded easily and the chance of overlooking an expense is reduced. Receipts are required to reclaim VAT, but even if these have not been kept, you will at least get the benefit of the expense against Income Tax.
9. Get a Diesel Card
Most tradesmen have commercial vehicles or diesel cars. Diesel is a significant expense but often receipts are mislaid, effectively throwing away 23% VAT that could be reclaimed on top of the actual cost of the diesel. A diesel card will eliminate the hassle of keeping every receipt and ensure that the full amounts are deducted for tax purposes, and the VAT is fully reclaimed. If invoices are mislaid copies can be obtained if needs be.
10. Get an Accountant who is an expert in your field
Expert advice could save you a substantial sum on tax, and relieve you of the hassle of bookkeeping and tax returns, leaving you free to concentrate on what you do best. Furthermore, it’s a competitive market so accountancy fees are good value right now, and best of all, you can write them all off against tax.
Liam Burns is a Chartered Tax Adviser and Chartered Certified Accountant, who specialises in accountancy and taxation for clients in the construction industry. You can contact Liam at http://liamburnsandco.ie/ via email: firstname.lastname@example.org or telephone: 01 8685944.