Starting a business2 min read
Sole trader or limited company? The tax difference
A sole trader pays income tax on every euro of profit. A company pays 12.5% on profit it keeps. Here is what that means in practice.
By Irish Fintax Updated
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When you start working for yourself, one of the first decisions is whether to trade as a sole trader or set up a limited company. The work is the same. The tax and the paperwork are not.
Sole trader
As a sole trader, you and the business are the same person for tax. Your profit is taxed as your income, through income tax, USC and PRSI, whether you take the money out or leave it in the business account. You file a tax return each year and pay preliminary tax for the year ahead.
Limited company
A company is a separate legal person. It pays corporation tax on its own profits: 12.5% on trading income and 25% on passive income such as rent or interest. You are then taxed personally on what you take out of it, as salary or dividends.
| Sole trader | Limited company | |
|---|---|---|
| Tax on profit | Income tax, USC and PRSI on all of it | 12.5% corporation tax on trading profit |
| Money you take out | Already taxed | Taxed again, as salary or dividends |
| If things go wrong | You are personally liable | Liability usually stays with the company |
| Paperwork | An annual tax return | Company accounts, an annual return to the CRO, payroll |
Getting set up as a company
- Register the company with the Companies Registration Office (CRO).
- Register it with Revenue for corporation tax, and for payroll and VAT where they apply.
- Open a business bank account and keep company money separate from your own.
- Keep records from day one: invoices, receipts and bank statements.
Estimate a company's tax bill with the corporation tax calculator, and find memos and setup guides, including one on salary versus dividends, in Accounts and Finance.
General information only, not financial, tax or legal advice. Rates and rules change and your own situation matters, so check with Revenue or a qualified, regulated adviser before acting on a big decision.
Reviewed by Arif Bhuiyan, FCA, ACA, MBA, MSc, and a group of Ireland-based finance professionals who want to make financial literacy easier for people in Ireland.
