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Meanwhile my (single-person) company is paying around 20% corporation tax, and then I'm getting taxed a further 20-40% on top of that when I pay myself.
by kowlo 5y ago
Meanwhile my (single-person) company is paying around 20% corporation tax, and then I'm getting taxed a further 20-40% on top of that when I pay myself.
- deafcalculus 5y agoIsn't salary a deductible expense?
- kowlo 5y agoYou're right - but it depends how and when you pay yourself... a balance of salary and dividends, where dividends are not deductible. For me I may have a good year followed by a weak year, so I use last year's profit to keep me going!
- oarsinsync 5y agoIf you're in the UK and still using dividends as a significant method to self-compensate, you may benefit from speaking to a (better) accountant. (Your circumstances may vary, this is not financial advice, YOLO, etc)
- tailspin2019 5y ago> If you're in the UK and still using dividends as a significant method to self-compensate, you may benefit from speaking to a (better) accountant. I'm curious what you're eluding to here? Using dividends as a significant method to self-compensate (for single-person companies) seems to be a pretty common practice recommended by every UK accountant I've spoken to / used. EDIT: Updated for clarification
- kowlo 5y agoIt's the advice I've received too, but I'm also new to most of it. One downside (I think) is that I can't take advantage of the R&D tax credits with this approach!
- callamdelaney 5y agoThere's roughly £12,000 tax free allowance on salaries and only £2500 on dividends. The common recommendation is to maximize your tax free allowance (pay yourself 12k PAYE) and then pay out anything else as dividends (though dividends legally require you operate at a profit).
- tailspin2019 5y agoYep, totally understand that. That's the standard common advice that I'm referring to and that the post I replied to seemed to suggest is not what a (better) accountant would recommend. Unless I'm interpreting that post incorrectly.
- nly 5y agoIt mostly depends if you intend to make significant pension contributions. Let's say your company has £100K to play with and you want it all. - You can pay yourself a £100K salary, of which take home pay will be about ~£67K - You can pay yourself a £8,840 salary tax free in order to qualify for the state pension but minimize national insurance, and pay 19% corporation tax on the remaining £91,160, which leaves £73,839 to pay in dividends. Take home pay will be ~£69K. A win. - Roughly (as this is more complicated). You can pay yourself a £48,840 salary, sacrificing £40K in to your pension completely tax free, pay corporation tax on the remaining ~£51K, and then pay it out as dividends. Take home will be about ~£47K with another £40K in your pension! - More elaborate schemes are possible, where you use your personal pension to invest in commercial property which you then lease back to your company as a tax deductible expense.
- iso1210 5y agoTax avoidance, helping the rich avoid paying for the society they benefit from since the year dot
- tebbers 5y agoNot only that but you get significant tax relief on your £40k pension contributions (about £8k I think) so takehome plus pension is about £95k from the £100k initially.
- nly 5y agoNo, the £40K sacrifice (the max) would be from gross. Tax 'relief' (it's a refund despite what anyone says) only applies if you pay from your post-tax income.
- softveda 5y agoI am surprised such loopholes still exist in UK. In Australia if you setup a company and 80% of the company's income is only from your own personal services from a single client then your company has to pay tax on personal income tax rates. These sort of loopholes were closed many moons back.
- maccard 5y agoIf you're paying dividends, you're not paying 40% income tax on that. Microsoft employees are also paying 20-40% income tax remember.
- Grustaf 5y agoSure, so Microsoft still (not so) indirectly contributes to the tax coffers. But it's still pretty bad that the rich MS shareholders can benefit from schemes like these, while employees can't.
- tootahe45 5y agoDon't forget your cap gains and consumption taxes
- frockington1 5y agoAnd death tax. And property tax for good measure
- duped 5y agoWe don't have a death tax in the US. We have an estate tax that is exempt up to $11 million and can be spread out 15 years for businesses.
- frockington1 5y agoThe proposed capital gains changes would ensure that most Americans will be targeted. If the cost basis doesn't recent on death many Americans will immediately get hit with taxes. With the top rate being upped to 43%, its gg for anyone who planned on leaving their loved ones money
- duped 5y agoI mean that's a bad characterization. Most Americans don't have savings to be inherited, so "many Americans" should be quantified first. The gains are only taxed when they are realized, so you don't owe taxes on inheritance - only when you sell the assets. You would not owe at the top rate unless your income (including realized gains) eclipses the threshold. That's not a death tax. It's an income tax. You don't get out of it by dying.
- skinnymuch 5y agoMost Americans aren’t leaving their loved ones solid money after they are gone. Being on HN, it is possible you live in a bubble with far higher avg income and savings than the rest of the country.
- throwawayzRUU6f 5y ago
- neilwilson 5y agoInvest your surplus then you won't have any profit to be taxed upon. Which is what Microsoft is doing. Alternatively lobby your government to replace corporation tax with a company payable tax on the labour a company uses - which is actually what tax is for: to release manpower for the government use. Then Microsoft can't avoid it by profit shifting.
- ulzeraj 5y ago> company payable tax on the labour a company uses Wouldn't that create a perverse incentive to hire less and overload the remaining employees? I say this because that's exactly what it does on my home country.
- neilwilson 5y ago"Wouldn't that create a perverse incentive to hire less and overload the remaining employees? " That rather depends whether there are more jobs than people that want them. If there isn't then you need a public job Guarantee option to swing the balance of power. We want the private sector to hire less and automate more. That's how we push forward productivity. What we want to remove from them is the "what about the jobs" argument. Then it all works.
- hhjinks 5y agoThen give workers actual rights and the ability to unionize.
- ulzeraj 5y agoA quick google search shows Irish citizens can voluntarily join and leave unions. Of course there might be more to it and I have no idea how things work there.
- weird-eye-issue 5y agoAre you in the US? If you have a single person company you could have a simple single member LLC set up so profits would flow through to you without getting taxed at the company level. Of course you'd also have to pay self-employment tax on top of the regular income tax though (can get around some of that by using an S Corp).
- TomGullen 5y agoWe're also in the UK, make sure you're taking advantage of any tax benefits you may be entitled to such as R&D tax credits. They are back datable.
- rorhug 5y agoFYI, Ireland has not been in the UK since 1921.
- wil421 5y agoFYI, if you look at OPs comments you will see they said they are in the UK.
- topbanana 5y agoAnd Entrepreneurs' Relief on capital gains
- motives 5y agoAlso worth mentioning in the case of Ireland the KDB, whereby you can get an effective 6.25% rate on your corporation tax for certain R&D heavy activities (software etc.). This would be advantageous I think for most smaller businesses HNers are typically involved in if they wish to operate in the EU.
- canadianfella 5y agoDatable?
- rorykoehler 5y agoSurely the amount you pay yourself is deducted from the amount you pay 20% corporate tax on before you are taxed?
- Scoundreller 5y agoProbably not. Dividends aren’t a deductible expense for a Corp. Income is (which is why the rates are higher).
- jbverschoor 5y agoThere you pay 40-50% incometax first
- rorykoehler 5y agoNo one pays that much in a progressive tax system. Every time this discussion comes up people spout off these numbers but if you calculate out how much you actually pay it's probably in the 20-30% of total salary range. That's still high but it's just dishonest and makes people look like idiots when they throw around 40% etc. If you are truly paying 40% of your income in tax you are earning millions and are benefiting massively from the system already.
- benjaminwootton 5y agoIn the UK you pay a flat 40% over around £45k, no ambiguity whatsoever, then 45% over £150k. Not exactly millionaire status.
- Nextgrid 5y ago150k sounds very low when you take into account this tax rate and the property prices in London.
- ben_w 5y agoLondon property is considered abnormally expensive in the U.K., and £150k is only slightly less than the £157k which the Prime Minister earns. Median U.K. income is £29,400: https://en.wikipedia.org/wiki/Income_in_the_United_Kingdom https://en.wikipedia.org/wiki/Income_in_the_United_Kingdom
- FranzFerdiNaN 5y agoThis is working as intended. The entire tax system is rigged to benefit multinationals, with employees and small businesses forced to pay the tab.
- jonplackett 5y agoWas about to comment exactly this. And they keep making it worse for small companies too!
- m12k 5y agoYep, the current corporate tax laws basically punish single-nation companies, while giving multinationals a free pass. International tax laws desperately need an overhaul.
- cheph 5y agoIs Ireland not a democracy? Can't they vote to change their own tax laws if they have a problem with them?
- PKop 5y agoThis is you assuming "democracy" actually works to empower average people to make these types of changes, instead of being co-opted or controlled by these same corporate behemoths.
- gbear605 5y agoThe problem is not that Ireland gives a good deal to companies in Ireland, the problem is that Microsoft can falsely pretend that their Irish branch is the one making all the profit and then not having to pay any tax elsewhere.
- __alexs 5y agoThey don't want to. These companies employ thousands and thousands of people in Ireland and pay them pretty well. In the bigger picture it's probably in their collective interest to tax them more but there's a pretty strong individual incentive to maintain the attractive tax environment.
- G4E 5y agoWhy would they do that ? The light tax they require from those entity still benefits them immensily, because those entity choose to pay them there instead of elsewhere. If Ireland introduced more taxes those big corps would move away, so they would actually receive less...
- Tepix 5y agoYou can't receive less than zero
- menzoic 5y agoWhich country is your corp registered in? In U.S. you can register and S. Corp to avoid being double taxed.
- KMag 5y agoThe disadvantage of an S. Corp is that you don't have any flexibility in evening out profit distributions between good years and bad years, right?
- jermaustin1 5y agotechnically true, since every year you take a cash distribution of the profit, BUT you then roll that into the following year and all distributions are tax free... cuz you already paid taxes on it.
- bklyn11201 5y agoThis is correct. If you know the income will arrive in the future, you should aggressively shop banks looking for a line of credit to even out your lumpy income. The interest paid to the bank for the LOC is tax deductible by the business.
- seanmcdirmid 5y agoWhich country are you in that your own payroll isn’t at least corporate tax deductible? edit: ah, it looks like you are paying yourself via dividends.
- jgalt212 5y agodon't worry, Biden will fix that. Soon you'll be paying 30% and then 20-40%.
- teekert 5y agoYeah, it would be so nice if a lot of small companies got organized and tried to do these tricks together, just to show the ridiculousness of it all.
- ChuckNorris89 5y agoYou miss the part where small companies have to compete against each other so organizing together would be impossible whereas entities like Microsoft, Facebook, Apple, Google, etc. are basically unregulated monopolies in their respective fields so they get to steer the ship as they please.
- Grustaf 5y agoIt wouldn't be impossible at all, you can of course cooperate with competitors to lower your taxes while competing for customers. Not that you necessarily need to band together with your competitors for this, there are plenty of companies out there.
- ccvannorman 5y agoWhat is the minimum viable income to take advantage of these tax loopholes? Would I need to form an LLC or C-Corp (does it matter)? As long as big corps are cheating, let's be transparent about the data and how everyone can act the same way. I'm all for taxing Microsoft et. al. the correct amount but in the meantime let's democratize this action. Maybe it will prompt legal change for everyone. I'd love to see a Playbook for Tax Loopholes for Everyone. - minimum annual profit required - legal steps to take - recommended law firms
- Grustaf 5y agoI don't think it would be particularly costly to set up an Irish company, figure out a structure and set up a company group with internal invoicing etc. If you can spend a few 100 k on administration a year I'm guessing it would be worth it.
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