Taxes are a part of everyday life and will apply to your business too. In this blog, we’ll focus on the tax differences between these two popular business structures. Limited Company taxes are a bit different to Sole Traders.

One of the main questions we get asked is “should I set up as a Sole Trader or Limited Company?” So if you’re deciding whether you should set up a company, it’s useful to see if you’re willing to take on the responsibility.

If you’re interested in learning more about our Company Formation service, take a look at our guide here.

Tax on profits

Sole Traders can pay up to 52% tax

A Sole Trader pays up to 40% income tax. USC and PRSI also need to be added, which increases their tax rate to 52%. This will apply to all income of the business. Therefore you should consider the amount of income you expect to make and the tax you'll need to pay on it.

Irish Limited Companies pay 12.5% tax

A Limited Company is a separate legal entity so it pays tax on company profits at 12.5%. If you take a salary or dividends, you'll pay tax on that like a normal employee but you have more flexibility and you can plan ahead. There are also other ways an accountant can help you save on your tax bill as a Limited Company.

Taxes on your salary

As we mentioned, Sole Traders are taxed on everything they earn (drawings). So they’re paying up to 52% on their income.

On the other hand, a Director of a Limited Company can decide how they want to pay themselves and their employees. Therefore there’s more room for tax and salary planning to ensure you are the most tax efficient.

Salary vs dividends

Paying a salary...

This is a fixed annual payment that is paid to an employee or Director at regular intervals, such as weekly or monthly. A Shareholder isn't paid a salary unless they are an employee of the company. Both Sole Traders and Limited Companies can pay salaries. All you need to do is register for PAYE tax.

Receiving a dividend...

These are also regular payments but usually only paid once a year. This type of payment only applies to Limited Companies and its shareholders. Directors don't take dividends unless they're also a Shareholder of the company. Usually no PRSI is paid on dividends so it's attractive to non-propretary Directors (owns less than 15% of shares).

Paying taxes on expenses

Both Sole Traders and Limited Companies can claim back expenses that are wholly and exclusively related to the business.

If you want advice on what exactly what expenses you can claim, join our free Startup Webinar with Chartered Accountant Jennifer Harrison.

Tax on pensions

As an employee or a Director, it may be tax effient to contribute to your pension as they are not subject to the same limitations as a personal pension.

If you are a Director or an employee of a Limited Company, your pension contributions to an occupational scheme can be deducted against company’s trading profits. This means that you company’s taxable profits are reduced and the company pays less Corporation Tax. This is because the company takes a deduction for any pension contributions first and pay the tax on the reminder of profits after such deductions. The individual will be subject to tax on any withdrawals from the pension fund.

What to do now you've learnt about Limited Company Taxes?

So you’ve learnt the basics on Limited Company taxes, are you ready to start your business?

If you’ve decided that you’re ready to set up an Irish Limited Company. Get in touch with us and we’ll help you pick the perfect package for you.

Accountant Online offers the complete package for company registration in Ireland. Don’t worry if you still have questions about setting up, our dedicated Client Services Team are happy to help you each step of the way!