Border a major divide on pay for business owners

The business community in the North has long suffered from a particular condition known as Border envy. Although the recent austerity crusade in the South may have temporarily relieved some of the more obvious symptoms, long standing pressure points such as lower rates of corporation tax, continue to cause pain.

But with the possibility that Northern Ireland may soon be able to match the attractive corporation tax rates south of the border, it raises the question about the respective advantages of having a business in the North or in the South.

On basic fundamentals, Northern Ireland can pretty much hold its own against the South – particularly when it comes to operating costs. Estimated salary costs are around 30 per cent lower in the North than in Dublin and prime office rents – at around £12.50 per sq ft in the greater Belfast area – are among the lowest in western Europe.

But if you were setting up a new business or have just been offered a new job and could choose whether to live North or South, which would offer you the best opportunity?

In six weeks time the British chancellor will unveil his Autumn Statement which may or may not contain some new taxation plans. Last year, George Osborne announced a £1,000 transferable tax allowance for married couples and a number of new measures on business rates for commercial premises.

While we wait to see what Osborne may produce this year, there is always the latest budget moves from Minister for Finance Michael Noonan south of the Border to consider – from the reduction in the top rate of tax to the changes in the seed capital scheme.

Might the grass be greener if you are an entrepreneur in the south or if you are an employee in the North? According to research compiled by accountants PKF-FPM, who specialise in cross-border audit, tax and advisory services, there are big incentives to choosing one location over another depending on your particular circumstances.

Paddy Harty, a director with PKF-FPM, says small business owners might be surprised to discover that Northern Ireland could prove to be the best option for them.

“There is a significant difference between the total taxes payable (corporate, personal and PRSI [pay related social insurance]/ NIC [national insurance contributions] by an owner managed business in Northern Ireland versus the Republic of Ireland.”

Take for example a case study of a husband and wife team, whose business makes a profit of £100,000 or an equivalent €125,000 before the owners decide their renumeration strategy and assuming that they extract all the post tax profit.

Harty says: “In Northern Ireland, this could be a combination of a modest salary with the remainder of the profits extracted by dividend. Due to UK dividends not attracting NIC and being essentially ‘tax free’ as long as they do not cause one to enter the higher rate of tax (earnings over £41,865), the total loss of tax in the Northern Ireland example is slightly over £16,000 – which is almost all corporation tax.”

In the Republic, dividends do attract income tax, PRSI and the Universal Social Charge, so owner managers would be better placed to take a salary as opposed to a dividend and a salary – because they get corporation tax relief on a salary and not on a dividend.

Harty says: “The total tax payable in the Republic of Ireland in my example is more than double the Northern Ireland tax because the effective rate in the Republic is equal to 36.18 per cent versus the Northern Ireland rate of 16.94 per cent.”

The figures alone may help explain why PKF-FPM has seen an increase in the number of small firms – formerly located in the Republic – actively looking at the North as an attractive business location.

“The majority of business in Ireland (particularly Northern Ireland) are small owner-managed ones often owned and managed by married couples. This ‘family’ is considerably better off taxwise in Northern Ireland than their Irish counterparts purely due to the personal remuneration structure that the Northern Ireland owner managers can have which has no tax saving effect in Republic of Ireland,” Harty concludes.

But if you are considering an employee job offer, it could be a very different scenario according to his colleague Desi Foley, senior tax manager, at PKF-FPM.

Folely said on the basis of salaries – looking at one high earner and one more average wage – there are clear winners and losers, especially if you factor in the higher rate of child benefit payments in the Republic.

“If you look at the scenario of someone who earns £40,000 a year or €50,000, is married with one income and two children, once you take taxes into account, net pay plus child benefit in the South would be €42,915 compared to a net pay plus child benefit in the North of £31,926 (€39,907). Based on exchange rates, the family in the south could be potentially €3,008 a year better off”.

Folely does advise that these calculations do not include other factors such as a lower cost of living in Northern Ireland plus free healthcare and prescription charges.

But if you are a high earner employee, the clear cut tax advantages of either jurisdiction are less pronounced – on tax rates alone and without any references to cost of living differentials. The more generous child benefit allowances in the South might give you slightly more net pay, but only marginally.

If you are highly paid employee, it might be a case of home is where the heart is when it comes to the best location to be based in but for small businesses owners the choice could be a lot more complicated.