Pension Season

In the Irish context, all self-employed people have an obligation to get their tax returns in by the end of October. This can be a very stressful, pressurised time for many small business owners around the country. While this is happening, you may not notice that the advertising around pensions steps up a gear. The lights in Financial Brokerages stay on into the night as they contact their self-employed clients advising them to put money into pensions which have the benefit of allowing you to qualify for tax relief and reduce your tax bill.

This phenomenon has come about as a result of the daft situation we have in Ireland in terms of how the self-employed pay their tax. They pay some tax at this time of the year and the balance later. Tax is a burden which for some people seems to be never-ending, it hangs over them throughout the year. They have to accumulate the cash to pay for tax on income not yet earned in addition to the balance of what was owed for last year.

retirement-egg

People put money into pension arrangements at this time of the year for a simple reason, they are a very efficient means of getting tax relief now and for accumulating your money for retirement. Pension arrangements build reserves, but the problem is once you put money into one it is no longer available to you. You can’t get it back till you are age 60 no matter what your circumstances are.

That may not be the right thing for your business right now.

Self-employed people need to look at their cash flow and the time frame involved between now and the point at which you will retire. These factors raise the question of whether this is a choice you want to make right now.

Another question that may cross people’s mind is whether they have the right business model for their business. Being self-employed has its own difficulties, particularly when it comes to tax. All the profits that are made by the business are subject to tax at the personal rate and are subject to USC and PRSI.

As a self-employed person, there are limited tax shelters to reduce your tax available to you. There is a lack of flexibility when it comes to controlling the level of tax you pay and when you pay it. Your cash flow is restricted as you have to hold the cash to pay the tax when it is due. Therefore, putting money into a pension pot is not always the right thing to do.

Being self-employed puts your own personal assets on the line if your business gets into difficulty. If something goes wrong in a business relationship, the aggrieved party has the opportunity to ‘have a go’ at you. You are in the front line.

The alternative to being self-employed is to set up as a Limited Company. This provides the opportunity of retaining profits within the company. It also allows you to draw an income from the company, one which enables you to the live the lifestyle you want to. It is subject to PAYE and so you have greater control over how you pay tax. The profits retained within the company are subject to corporation tax at 12%, which is quite attractive. It is much lower than the personal rates. In addition, corporation tax is not subject to PRSI or the USC. You would also have the opportunity to claim expenses tax-free from the company within reason.

Trading via a limited company means that it limits your personal exposure. Your customers or clients are doing business with the company rather than with you directly. Therefore any liabilities that arise will be dealt with in the company first and foremost.

In addition to these benefits of running a limited company, it can also be passed on when it is time for you to retire, allowing you to get value out of it, whenever that happens to be.

When it comes time for you to retire there is the opportunity, in the Irish context, for a couple between the ages of 55 – 65 who have been working in the business for a ten- year period to withdraw a lump sum of up to €1.5 million under the retirement release scheme. You can also take ¼ of what is in your pension arrangement as a tax-free lump sum, up to €200,000.

So the same thorny question arises, what do you want your business to do for you?

As a self-employed person, as we have seen, there is a lot of complexity around the way you pay your taxes. It’s a lot simpler when you run a limited company.

Before making any decisions in relation to changing your current business structure be sure to avail of professional tax advice so that you make a well-informed decision based on your own particular circumstances. Different business structures work best for different people based upon their own situation, so choose the one that suits you best.

As this is Pension Season, it is worth considering that as a self-employed person there is an opportunity to invest some liquid assets in a well-chosen pension arrangement which will benefit you now & in the future, assuming that your business has the available resources to do so.

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