Tax implications for unmarried couple with children

mambo

If my partner and I (not married) have a child and she stays off work for a couple of years to raise the child, and she has no income, then I think I'm right in saying her tax credits go to waste as she has no income. And because we're not married I can't benefit from her tax credits to reduce my tax?

I'm self-employed (sole trader), so could we get around this by setting up a limited company and making us both directors of the company. Then if the company earns 70k in a year (based on my work), the company could pay us each a salary of 35k, on which we would both pay tax (and avail of our personal tax credits). Even though she would not be contributing anything to the company, other than attending the AGM (in our local pub )

Dixie Chick

Its not as simple as that, in fact by becoming a company director yourself you would lose your PAYE tax credit. Also there are costs in setting up a compnay and als costs in filing your accounts with the companies office and revenue every year.

ellips

There are also tax credits that she would lose as an employed spouse so as mentioned above its not that simple at all.

Would you not just get married and make her an honest woman?

You're sharing everything else already so all thats left to share is the tax credits...

jim_bob

if she was unemployed and on job seekers allowance, would they not use your salary to means test here surly it works both ways??

mambo

ellips wrote: »

Would you not just get married and make her an honest woman?

Neither of us is that worried about whether we're married or not (just a bit of paper, and all that). And she doesn't want to get married just so we don't suffer a tax hit, and neither do I.

Mr. Incognito

Mambo- this is classic down the pub ill advised ill educated rubbish.

So, just to be clear. To save yourself a tax credit of oh, about 1830 a year you want to:

Set up a company, on which your companies profits will be taxed at 12.5% and then both your salaries will fall to both employers PRSI at 12.5%,and then you'll have your own PRSI on top of that, PAYE and the health levy. You will lose your tax credits as a propertiery director. Your missus and you will be oblidged to File Form 11's every year and in addition it's a close company so all the close company legislation and restrictions will apply.

Also there are only two ways of removing cash from a company- salary or dividends. Both will fall to tax. Dividends will fall to corporation tax and THEN you will be taxed personally on the dividend income, in effect taxed twice on your salary.

Also companies are red paper beasts. You will instantly have to submit accounts every year, personal and corporation. Added to which you haven't a clue what your at so we'll be generous and add penalties and interest to the outstanding corporation tax and underpayment of PAYE, employers PRSI etc.

You see where this is going........

so we don't suffer a tax hit, and neither do I.

You're going about it a funny way.

Mar-Yeah

Mr. Incognito wrote: »

Added to which you haven't a clue what your at

This is a serious case of pot calling kettle black...

The main employers PRSI is 10.75%, and has been so for years. In any case a proprietary director pays PRSI at self-employed rates - 3% or 5% and 5.5%.

The OP wants to save tax by utilising his girlfriend's SRCO, not her tax credits. They could save tax of (41% - 20%) x €36,400.

If the company pays out all its profits in salary, there would be no extra corporation tax costs compared to a sole trade, salary costs are allowable expenses in calculating taxable profits for corporation tax.

The company can also be used for pension planning, succession planning, limitation of liability etc.

The other posters are correct though, you would lose your PAYE credits and there are a lot of expenses involved in running a company. Look into it carefully first.

And get tax advice from an up-to-date professional!

swanvill

Hi
Just a quick thought…… so therefore not thought out very well :-)
The first thing to consider is that if a transaction has no commercial basis and is done just to purely avoid tax, then the Revenue ‘can look through’ the transaction and disallow any portion of it on the basis that it is a tax evasion scheme & tax you if the transaction had not happened
The second thing is information displayed here is for guidance and one should always employ a professional tax adviser / accountant for advice.

Can the self employed person not register as an employer and hire his partner as an employee? Thus saving all the legal & filing requirements that goes with a company? Please note will you not be able to avoid PRSI & her rights as an employee. If you do this route all should be fine if she has genuine work to do and is paid accordingly. Hell even after a couple of years you could make her redundant, with all its tax advantageous. However there was case in the Employment Tribunal were an ex partner/girlfriend sued for unfair dismissal of her former lover. He was a solicitor (Mannion I think) and he had her registered as an employee using all her allowances and keeping her pay for himself. Anyway they broke up & she sued for unfair dismissal. So be careful trying to save a few quid in tax as it may cost you a lot more :-)

You may want to consider marriage in the future as inter-spousal transfer are exempt from Capital Acquisition Tax, Capital Gains Tax etc.

Mr. Incognito

The OP wants to save tax by utilising his girlfriend's SRCO, not her tax credits. They could save tax of (41% - 20%) x €36,400.

She has no income and they are not married. If they were married the increase to the SRCO is only about 8000K, at the top rate a saving of what, 3.6K ish, more than offset by the loss of his PAYE credits and as both of them are directors of the close company she'll lose her credits too.

In reality 100% of the company profits are not going to be paid in salary- it's impossible to know the ingoings and outgoings. whatever is left is going to fall to CT, THEN income tax and anything undistributed will fall to the close company surcharge.

I can't really see the advantages of a comapny for pension planning. More better pension planning for a sole trader with his profit levels rather than setting up a company scheme. If you are running the scheme through the company he is not getting an income tax deduction for contributions as he is a director of said company.

In short, it's a bad idea.

Mar-Yeah

Incognito - read the OP. The idea is to pay the girlfriend a salary and therefore use her SRCO and credits.

it's impossible to know the ingoings and outgoings. whatever is left is going to fall to CT, THEN income tax and anything undistributed will fall to the close company surcharge.

That's what a good accountant and timely preparation of accounts and returns are for. Establish profits within P35 filing deadline and pay additional salary to directors.

I can't really see the advantages of a comapny for pension planning.

Do you work in tax / accounts? Pension planning is one of the major benefits of incorporation for small traders. Scope for employer contributions and personal contributions.

"In short" it can be a good idea, but the OP should look into projected costs and benefits carefully.

Mr. Incognito

Company contributions to pension out of what profits?

As I said above

More better pension planning for a sole trader with his profit levels

You're trying to minimise profits to avoid CT.

It can be done I guess, but why bother?, the amount of effort and balancing of accounts is not worth it for the projected savings of his wifes SRCO tbh. (I did miss the fact he wants to pay her a salary) Incorporating companies is always a bad idea for a sole trader unless you have significant income. The guy wants to know if he can make a tax saving by setting up this structure and having his AGM down the pub. Common sense will tell you he can't. If he wants an adminstrative nightmare and wants to take on an accountant full time to run this little escapade, go right ahead. He is earning 70K. Incorporating a company is a waste of time.

When you think of the additional filing, accountancy costs, red tape etc, it's going to be a mare.

You may want to consider marriage in the future as inter-spousal transfer are exempt from Capital Acquisition Tax, Capital Gains Tax etc.

Excellent excellent point. Had totally over-looked this myself.