PAYE tax credit
Company directors should normally be set up as PAYE employees of their company and are taxed under the PAYE system. However there are differences in the way that proprietary company directors are taxed under PAYE compared to normal employees. A proprietary company director is one whom also owns 15% or more of the share capital of the same company. You are not entitled to the PAYE tax credit when you are self-employed or when you are a company director who also owns greater than 15% of the share capital of the company. The PAYE tax credit is an important consideration as it in effect allows you to earn an additional annual €8,250 free from PAYE taxes (based on the PAYE tax credit of €1,650 applicable for the 2011 tax year).
It is however possible for company directors to restructure their affairs. For example, you can stand down as director but retain your shareholding. Alternatively you could reduce your shareholding to less than 15% and remain as director. In both of these scenarios you would no longer be classified as a proprietary director and would then become entitled to the PAYE tax credit.
A second important issue for company directors to be aware of is when Employers PRSI is and is not chargeable on their salary. As Employers PRSI costs are charged at either 8.5% or 10.75% of the gross salary payments, avoiding Employers PRSI can result in significant tax savings for the company. Any re-structuring of your affairs in order to become eligible for the PAYE tax credit should be done whilst also taking account of Employers PRSI costs.
The rules concerning when Employers PRSI should be charged on director’s salaries is not as clear cut as the rule regarding the PAYE tax credit. Employers PRSI is not charged on salaries paid to company directors whom are considered to have a “controlling interest” in the company. The difficulty with this is that as there are no statutory guidelines or judicial interpretation of what constitutes a “controlling interest” it is open to debate and must be judged on a case by case basis.
The important point to be aware of is that if in restructuring your affairs in order to become eligible for the PAYE tax credit you wish to stay on as a company director (but plan to reduce your shareholding to less than 15%) it is important to ensure that you can still demonstrate that you still have a sufficient “controlling interest” in the company.
PAYE tax credit vs. Employers PRSI
In some cases restructuring your affairs to avail of the PAYE tax credit may mean that you will no longer be deemed to have a “controlling interest” in the company and therefore the company will be required to pay Employers PRSI on your salary. Where this is likely to happen you will need to make a calculation as to whether you will benefit more from the PAYE tax credit or from savings on Employers PRSI. Depending on the amount of salary being paid, the savings on the Employers PRSI can outweigh the loss of the PAYE tax credit – for higher salaries this would be the case. However, where lower salaries are being paid then it can be better to pay the Employers PRSI and get the benefit of the PAYE tax credit.
There are other matters to consider other than just financial when considering restructuring your affairs. One is the desirability of handing over your shareholding or stepping down as a director.
On what may be considered as an upside is to consider the social welfare benefits. Company directors with a “controlling interest” pay Employees PRSI at Class S which does not entitle them to a number of social welfare benefits including disability benefit and jobseekers benefit. If the director is no longer deemed to have a “controlling interest”, they will instead pay Employees PRSI at Class A which is the class which entitles you to a full range of social welfare benefits.
Lastly, proprietary company directors are required to file an annual income tax return (even where their only income is the PAYE salary from their company). If you were no longer a proprietary company director you would not be required to file an income tax return, thus reducing your tax compliance burden and saving on professional fees.