Personal vs Company income tax
Personal income tax in YA2019 (or calendar year 2018) for Singapore tax resident is at a graduated rate from 0% on first $20,000 to 22% on amount exceeding $320,000. For a chargeable income of $320,000, the average blended personal income tax rate is 13.92% ($44,550/$320,000). Ignoring tax rebates of $200 as this varies from year to year and is not a permanent component of the personal tax system.
Individual tax resident enjoys tax deductible in the form of reliefs which is capped at a maximum of $80,000. A gross personal income of $400,000 enjoying a maximum personal relief of $80,000, will give a chargeable income of $320,000 and be taxed at 13.92%. It is not very common for an individual to enjoy a $80,000 reliefs unless the individual is a married working woman with at least 3 qualifying children under working mother child relief (WMCR at 15%, 20% and 25% respectively on first, second and third child).
Singapore tax resident Company (for which the Company control and management is exercised in Singapore), is taxed at 17% flat but enjoys a tax partial exemption on the first $300,000 chargeable income for 75% exemption on the first $10,000 and 50% for the next $290,000. A company with chargeable income of $320,000 will be enjoy a partial tax exemption amount of $152,500 and taxed at 17% flat on $167,500 for a tax payable of $28,475. This will give an average blended tax rate of 8.9% ($28,475/$320,000). The 20% corporate tax rebate ($5,675) is not taking into consideration accordingly as it is not a permanent component for the tax system.
The average corporate tax of 8.9% is less than half (64% of personal tax of 13.92%) of the personal tax rate 13.92%. In addition, the amount of deductible against the gross corporate income is not limited as long as it is qualifying business expenses incurred in the course of business. The corporate tax rebate is also usually much higher (capping of $10,000 for company vs $200 for personal) than the personal rebate.
So is it tax beneficial then to pay yourself (a SME owner) more rather than leaving the profits in the company ? The answer is obvious by just looking at the average blended rate of 13.92% vs 8.9%.
A better approach will be to look into the marginal incremental tax for each loading of chargeable income to personal vs corporate. Every dollar of corporate chargeable income exceeding $10,000 will be taxed marginally at 8.5% up to a maximum of $290,000 and 17% flat for amount exceeding $300,000. Every dollar of personal chargeable income exceeding $20,000 will be taxed from graduated rate of 2% all to way to 22% for amount exceeding $320,000.
Without doing any mathematics, the following will be the easy answers:
- For chargeable income > $80,000, corporate tax is taxed at 8.5% vs 11.5% for personal tax. A disparity of 3% in favour of corporate tax.
- For any chargeable income above $80,000, every dollar of corporate chargeable income is taxed lower by 3% and the disparity gets higher to 11.5% when the chargeable income goes up to $300,000. For chargeable income of between $300,000 to $320,000, the disparity remains at 3%. From $320,000 onwards, the disparity widens to 5% and remains at 5% lower vs personal income tax (17% vs 22%).
- In short, the disparity between corporate tax and personal tax widens (3% to 11.5%) from chargeable income of $80,000 all the way to $300,000 and then the gap remains constant at 3% for chargeable income level of between $300,000 to $320,000 and thereafter at 5% (for chargeable income > $320,000).
It seems corporate tax is the winner in this but is it always the case ? The tipping point however, is when the chargeable income is below $80,000. At chargeable income below $80,000, each dollar of corporate chargeable income is taxed at marginally at 4.25% or 8.5% while personal chargeable income is taxed marginally at 0%, 2%, 3.5% or 7% respectively. This is the personal band.
However, when one looks at the average blended rate, it seems to give confusing results. At $120,000, average blended corporate tax is at 8.16% ($9,775/$120,000) and for personal tax rate is at 6.625% ($7,950/$120,000). The low average personal tax rate is due mathematically to the bulk of the $120,000 ($80,000 or 66.66% of $120,000) that is taxed at 0%, 2%, 3.5% or 7% respectively, giving to a low average blended composite rate. But for each additional dollar beyond $80,000, it is actually taxed at 8.5% for corporate but 11.5% for personal chargeable income.
That leads us back to the earlier topic that we talked about “What so great about the Tax system in Singapore for Singapore resident companies?” March 20, 2019.