29 November 2016, The Irish Times
Research shows how tax you pay varies depending on where you live on the island
Everyone who works in Northern Ireland will be able to hold on to a little more of their hard-earned cash from next year, thanks to Philip Hammond.
The UK chancellor of the exchequer is going ahead with commitments made by his predecessor, George Osborne, to increase the amount of money you can earn before you start paying income tax: to £11,500 (€13,500). He is also upping the point at which you pay the higher rate of income tax, to £45,000 (€53,000).
At the same time, Hammond wants to tighten up rules on how entrepreneurs and the self-employed can set up a company.
Right now anyone in the North can incorporate, with just themselves as the sole employee. This enables them to receive a salary, which is subject to income tax, as well as take their profits out as dividends. The tax rate on dividends for most small businesses is much lower than income tax, which is clearly a concern for the UK treasury.
For the estimated 86,000 small businesses in the North that have no employees bar the founder, the change could be worrying, even more so against the backdrop of the uncertainty surrounding the fallout from the UK referendum.
So is it just a case of grimace and bear it, and hope that life will not get worse for them in a post-Brexit Northern Ireland? Or could their working life (or, at the very least, their tax burden) be better somewhere else – particularly since one day they might able to look a few miles down the road and see a land Border with an EU member state.
The Border beckons
According to new research by all-island accountancy practice PKF-FPM, which is based in Newry, Co Down, there is evidence that life could be greener for some on a certain side of the Border. But which side might surprise you.Take a family firm managed by a husband and wife which, in the North, makes a profit of £100,000 a year and; the South, for argument’s sake using a foreign exchange of 85 pence to the euro, it makes an equivalent €117,647.
Both husband and wife teams would work equally hard to make these profits. Still, it might be easier to enjoy more of them in the North, given the current tax regime, says Desi Foley, senior tax manager at PKF-FPM.
There is obvious differences in how business owners pay taxes. For example, in the the Republic there is the universal social charge (USC) and the pay-related social insurance charge (PRSI). In Northern Ireland, there is a National Insurance Contribution (NIC).
“In Northern Ireland,” Foley says, “the husband and wife team as UK company shareholders or directors would be able to take tax free salaries for £11,000 each; the remaining profit would be taxed at a rate of 20 per cent. This would give them an after-tax profit of £62,400.
“These after-tax profits could be taken as UK dividend income, and UK dividends do not attract NIC – providing neither the husband nor wife are pushed into a higher tax rate bracket,”, which is from £43,001.
“When it comes to taxation of the dividends, the first £10,000 for the married couple would be tax free and the balance would be taxed at a rate of 7.5 per cent, which would effectively result in £3,930 in total personal taxes, plus corporate taxes of £15,600.
“Ultimately, they could take home up to £80,470 that year.”
In the Republic, for the same husband and wife team, the same approach would not work because dividends are subject to income tax, PRSI and the USC. This means owner-managers are advised to take just a salary rather than a salary plus a dividend.
Foley says: “Their joint salaries of €117,647 would be subject to tax at a rate of, firstly, 20 per cent, and then at rate of 40 per cent, which would mean they would pay gross tax of €38,499,” he says. “But they would also receive tax credits of €3,300. Then there is the USC of €4,463 and PRSI of €4,706 to factor in, bringing total taxes to €44,368, and leaving a net pay or income for the husband and wife team of €73,279 in that particular year.”
Analysis by PKF-FPM shows that once all of the relevant tax rates are taken into consideration, the husband and wife team pay an effective tax rate of 20 per cent in the North. For the married business owners in the South, the equivalent tax rate is 38 per cent.
“On the example of £100,000/€117,647,” Foley says, “the difference in terms of what the husband and wife shareholder/directors could take home after tax is just over €21,000, which is a pretty significant difference.”
But what if you are not a business owner or a budding entrepreneur. Is it as clear cut?
According to PKF-FPM, if you are thinking of switching to a new “employee” job North or South, issues such as the cost of living, healthcare and child benefit allowances are important to remember – not to mention current exchange rate considerations. If you are going to earn up to £27,000 or the equivalent €30,000 (based on an exchange rate of 80 pence to the euro), you would be better off by these calculations in the Republic by more than €1,000.
It is a completely different scenario again for high earners. In those cases, says Foley, the North wins.