As a small business owner you will be preparing for the submission of your PAYE/PRSI P.35 Annual Return, which is due for submission to the Revenue Commissioner on or before 15th February 2015, with an extension to 23rd February if both the submission and payment are completed electronically through ROS.
To assist you in your preparation of the above we have highlighted some of the key points for you to consider in relation to PAYE/PRSI for either yourself, your spouse/civil partner or your child.
1. PAYE Tax Credit
A PAYE Tax Credit, currently €1,650, is available to an individual whose income is subject to PAYE. However, a PAYE Tax Credit is not available to the following individuals:
- A proprietary director of a company (i.e. a director who owns 15% or more of the share capital of a company)
- Sole Traders, on income earned from that trade
- The spouse/civil partner of a proprietary director or a sole trader where they are paid a salary from that company/trade. If the spouse has employment with another unconnected company they will be entitled to the PAYE credit for that employment
- The child of a proprietary director or sole trader. However there are some exceptions to this rule, which we discuss below
2. Exceptions for the child of a proprietary director or sole trader
The child of a proprietary director or sole trader may be entitled to claim the PAYE Tax Credit, if the following conditions are met:
- The child is subject to PRSI under Class A
- The child’s salary is paid within the requirements of the PAYE system
- The child devotes “substantially the whole of his/her time” to the duties of the employment (Students and others employed on a part-time or temporary basis would not qualify for the PAYE Tax Credit)
- The child is not a proprietary director in their own right
- The amount earned by the child must not be less than €4,572 in the year of assessment.
If the child satisfies all of the above conditions they will be entitled to the PAYE Tax Credit, however the credit cannot be applied at source through the payroll system and can only be claimed by the child via a repayment at the end of the relevant year.
3. PRSI for Company Directors
Another important factor to consider as a company director is Employer’s PRSI. The rules surrounding the application of a PRSI class on salaries paid to directors are not as clear as they are for PAYE. Under Section 16 of the Social Welfare and Pensions (Miscellaneous Provisions) Act 2013, proprietary directors who own or control 50% or more of the shareholding of a company, whether directly or indirectly, are subject to PRSI under Class S, which is currently 4% of gross income.
The PRSI Class applicable to proprietary directors owning or controlling less than 50% of the shareholding of a company, is determined on a case by case basis, by the Scope Section of the Department of Social Protection.
As Class S employments are not subject to Employer’s PRSI, which can be charged at either 8.5% or 10.75%, (as at 15th January 2015), there is a significant saving for companies on salaries paid to directors under PRSI Class S.
4. PRSI for Sole Traders and others
In addition to proprietary directors, Sole Traders, partners in a partnership, professional individuals, farmers and those with income from investments, rents or maintenance payments are subject to PRSI at Class S which, as outlined above, is currently 4% of gross income.
If your income is derived from any of the above activities and you earn less than €5,000 per annum from those activities you are exempt from PRSI. However you may pay €500 as a voluntary contributor.
It must be noted that those subject to Class S, including company directors, are not entitled to the full range of social welfare benefits, with only the following benefits available:
- Maternity Benefit
- Adoptive Benefit
- Widow’s, Widower’s or surviving Civil Partner’s (Contributory) Pension
- State Pension (Contributory)
Furthermore, if you have not paid sufficient qualifying PRSI contributions in full, you cannot claim your State Pension (Contributory).
5. Tax Planning for Company Directors – PAYE Tax Credit V’s Employers PRSI
As a company director, you may consider restructuring your affairs to avail of the PAYE Tax Credit, by reducing your shareholding to below 15%. Based on the current PAYE Tax Credit of €1,650, you could effectively earn an additional €8,250 free from Income Tax, however USC may also apply. Such a reduction in shareholding will obviously reduce your controlling interest in the business and may also change your PRSI class from Class S, which does not attract Employer’s PRSI, to Class A which attracts Employer’s PRSI on your gross salary of between 8.5% and 10.75%, which would be a significant cost to the company.
Depending on the salary paid, the savings on Employer’s PRSI can outweigh the loss of the PAYE Tax Credit, however as outlined above you would also be sacrificing your controlling interest in the company.
What could be considered upsides to reducing your controlling interest in a company are that as a Class A individual for PRSI you would be entitled to the full range of social welfare benefits which include disability benefit and jobseekers benefit. Also, as a proprietary director you will be required to submit an annual Income Tax Return to the Revenue Commissioners. If you were to reduce your shareholding to below 15% and have no other sources of income other than your employment income, you would not be required to complete such a return, thus reducing your tax compliance obligations and associated professional fees.
We understand as the director of an owner managed business you may not wish to reduce your shareholding or control held in your own company. However, if you have a key employee which you are considering promoting and making equity available to them, the above tax planning matters could be of use to you.
If you have any queries in relation to the above or would like assistance in the preparation of your PAYE/PRSI P.35 Annual Return please do not hesitate to contact a member of our team.
If you would like to explore further options around your business, please contact us today firstname.lastname@example.org
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