In times when money is tight and every envelope coming through the door seems to be another bill we are all looking to reduce our outgoings.
Did you know that the person you married may be the answer to reducing one of the more significant bills in your life?
Spousal Employment and Spousal Pension Funding can slash income tax bills for those of you who are sole traders as follows:
Income Tax Saving 1: Since individualisation was introduced in the tax code, a Spouse of a Sole trader can earn up to €24,700 and pay standard rate (20%) income tax only. This is irrespective of the earnings level of the first spouse.
Income Tax saving 2: A Sole Trader can establish an Executive Pension for a Spouse they employ in the business and contribute a significant amount to the employed Spouse’s pension, as an employer contribution.
Income Levies, health levy and PRSI Savings: An employer contribution by a Sole Trader will escape income levies, income tax, PRSI and health levy.
For example:
Scenario 1
• John is a 38 year old self employed butcher with Net Relevant Earnings of €150,000 p.a.
• John’s wife Mary (age 42) is a Home Maker and she is not employed in the business.
• John’s maximum pension contribution is €30,000 (20%), saving €12,300 in income tax (41%).
Total income tax saving in scenario 1: €12,300
Scenario 2
• John decides to employ Mary in the business and pays Mary a salary of €27,400 pa.
• He then establishes an Executive Pension for Mary and contributes another €27,400 p.a. under the maximum funding rules as an employer pension contribution.
• John saves income tax of €5,754 (21%) on Mary’s salary and €11,234 (41%) on the pension contribution.
• John’s own maximum pension contributions are now €19,040 on which he saves €7,806 in income tax (41%).
Total income tax saving in scenario 2: €24,794
Income levy, health levy and PRSI saving on the employer contribution: €3,562
Total Overall Saving: €28,356
Notes
1. John would need to register as an employer.
2. The salary level for Mary must be justifiable.
3. Mary must be paid under Schedule E and tax and PRSI must be deducted at source.
4. Employer contributions cannot be backdated.
-Niall O’Higgins
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