Teknovis

I heard of an interesting situation in a small Irish technology company recently. The company is successful, and it generates a small profit. In previous years some of this profit was redistributed to employees in the form of a bonus.

However, this year management decided to do a cost-benefit analysis on these bonuses. It was not a surprise that they found it was very bad value, due to the punitive income tax rates in Ireland. See Bruton criticises high income tax rates for an explanation, and bear in mind that this does not consider employer’s PRSI. There is roughly 4€ of benefit to the employee for every 10€ spent by the company.

So instead the management allowed employees to choose from a list of alternative incentives that would not incur a tax liability. Some of these incentives included:

• Additional annual leave
• Additional investment in informal employee education and training
  • Travel and accommodation for attending foreign trade shows and conferences
  • Purchasing of new hardware relating to the business (smart phones, tablets, laptops)
• Improved office facilities
  • Free food
  • The creation of a recreational zone
• Donations to charities of the employees’ choosing

There were more, but I cannot remember them all now.

Unsurprisingly, not even one person choose to receive a bonus! So now the government is not going to get even a single cent of income tax from the potential bonus pool. Furthermore, this means that the company’s total income tax bill this year will be the lowest in many years.

So what is the moral of this story? There are two!

Firstly, there are many rewards that employers can offer employees that have a one-to-one cost-benefit balance. It is just a matter of thinking creatively!

Secondly, that by continually increasing income tax rates the government is taking a larger percentage of a smaller amount of money!

Tags: Ireland, Tax