Irish income tax is payable on both earned and unearned income. Taxable income includes salaries, pensions, capital gains, property and investment income (dividends and interest), and income from professional or business activities.
It also includes employee perks such as overseas and cost-of-living allowances; contributions to profit sharing plans; bonuses (annual, performance, etc.); benefits-in-kind (such as a company car, preferential loan, health insurance, club subscriptions, free accommodation or meals); stock options; home leave or holidays (paid by your employer); children’s private education; and storage and relocation allowances.
Note that if you’re returning to Ireland and your employer is paying your relocation expenses, you’ll need a tax exemption for these payments from the Inspector of Taxes.
If you set up a business in Ireland and hire employees, you must obtain their P45 or tax-free allowance certificate and notify your local tax office that you have employed them. If neither a P45 nor a current year’s tax-free allowance certificate is available (e.g. with a first-time employee), you’ll need to complete form P46 and operate PAYE on an ‘emergency basis’ until a tax-free allowance certificate is received. This means that employees are given the equivalent of a single person’s allowance for the first four weeks only and taxed at 20 per cent on the rest of their earnings. For the next four weeks they are taxed at 20 per cent on all their earnings and thereafter at 42 per cent on all earnings. Employees receive a rebate (as appropriate) once they have obtained a PRSI number and a tax-free allowance certificate, depending on their residence status.
If you’re an employee and have no P45 or tax-free allowance certificate, you’ll be taxed on an emergency basis as described above. Note that if you lose your P45, a copy may not be made and the necessary information must be sent by your employer to the Revenue Commissioners. If you’re a director of a limited company, you must submit a P45 or P46 to the tax office yourself. As a company director you may make lower PRSI contributions, but are subject to the same PAYE as other employees.
If you’re self-employed, you won’t need to pay income tax until after your first year of trading. Two months before the year’s end, you’ll be sent a preliminary tax notice informing you when your first payment is due. As a sole trader you pay income tax at the same rates as PAYE employees, but based on your net annual profit (i.e. after the deduction of legitimate expenses). If you’re operating as a limited company, however, you could be paying tax at a mere 12.5 per cent or even at just 10 per cent. This means that there can be a considerable tax advantage in operating a business through a company instead of as an individual.
There are also various tax incentives and reliefs for companies, such as the Business Expansion Scheme (BES) relief, research and development incentives, and film investment relief. On the other hand, there are tax penalties for closely controlled family owned companies (‘close’ companies) if excess funds are allowed to build up.
If your business is expected to make a loss in its early stages, it may be better to operate initially as a sole trader, because losses can be offset against income from other sources (if you have any) and you can then establish a company without immediately incurring high taxes. In terms of individual income, there’s a tax advantage in taking a dividend rather than a salary from the business, but the total tax paid by the individual and the company will be greater, as salary payments are tax deductible for corporation tax purposes.