When looking at contractor payroll and considering different methods of tax planning, something that often crops up is Entrepreneur Relief. But what actually is Entrepreneurs Relief and how effective is it for contractors?
Entrepreneur relief allows business owners to pay Capital Gains Tax at 10% on the gains made from the disposal of business assets, on the condition that they have been owned for at least 3 years. For contractors, this means that if you have a Personal Limited Company, your shareholding can be disposed of for just 10% tax. If you are the sole shareholder, any funds held in the company effectively becomes the value of your shares.
This is a common method of Ireland tax planning and will often be mentioned by umbrella providers among other tax planning solutions.
Simply put, if you are able to build up profits through 3 or more years of contracting, you would then be able to extract them and only pay 10% Capital Gains Tax on this money rather than income tax at 20% or 40%.
Sounds good, right?
Perhaps. But there are a number of factors to consider:
- Can you afford to build profits? You need to be in a position to build profits in your company. This means that you don’t receive them as regular income which, for many, isn’t feasible.
- Corporation Tax - Your company will file a return each year and pay tax on any profits accrued at a rate of 12.5%.
- You have to dispose of the assets - The profits you hold increase the value of your shareholding. In order to benefit from Entrepreneur Relief you have to dispose of this shareholding, either through a sale of shares or by dissolving the business. This may not suit your needs and will incur extra cost.
- You have to run limited company in the first place - This can be costly, time consuming and comes with a raft of responsibilities that most contractors don’t need.
So what is the alternative?
Keystone can offer simple, light touch and fully managed payroll solutions for your contractor payroll or freelancer payroll. It gives you access to all of your funds now, not in 3 years time, and we work with straightforward tax planning solutions that can help you to hold onto more of your money.
Why not take a look at our take home pay calculator or get in touch with one of the team who will be happy to discuss your options.