How can I reduce painful sole trader tax rate?

[cruiseshipjonny]

I know it’s a common concern. I’m employed part-time and basically hit the higher tax rate. I also the rest of the time work in a related field as a sole trader. I obviously offset some expenses but not far off half of my sole trader earnings, I know I will be paying in tax. I do some of the sole trader work in the UK and some over here but am tax resident in Ireland.

Is there ANY sense in considering setting up a limited company instead of working on a sole trader basis, either an Ireland or UK registered company? Can I accumulate my profits within a company structure that way and reduce my tax liability?

A friend who works in a similar field and is tax resident in the UK leaves a large amount within his company and just takes a level of dividend income annually that keeps his tax rate low but presumably this is not an option for me as an Irish resident.

 

[TomEdison]

The thing about retaining earnings in a limited company is that it works to shelter them from your marginal income tax rate for a while. But at some point the accumulated earnings have to come out of the company so that you can spend them — what's the point of earning them otherwise? — and at that point the question of income tax raises its ugly head again. Between corporation tax and income tax you can end up paying more overall tax this way, not less.

That's not to say there are no chances of getting some tax efficiency. For example, if you anticipate that you won't always be on the top marginal income tax rate, there might be some scope to accumulate earnings in the company and withdraw them later, when you are in a position to take advantage of a 20% marginal rate. But that's not really very different from using the company as a pension fund and, depending on how the figures stand up, it may be less efficient than just using an actual pension fund for the same purpose.

Bottom line is that there might be some scope for saving tax by doing this, but it's limited, it needs careful management because the tax goalposts are constantly moving, and if it doesn't work out it can make your situation worse, not better. I wouldn't consider doing this without the advice and involvement of a good tax adviser, which means its only worth doing if the tax savings will more than cover the adviser's fees.