How do I calculate my managing director salary?
Establishing the appropriate managing director salary is important to ensure your business's and personal financial stability and well-being. Understanding how your salary is taxed and the necessary contributions can help you make well-informed decisions as you prepare to establish your company in Cyprus. Below is a comprehensive guide to help you calculate your monthly salary, focusing on taxes and social security contributions and utilizing available tools to simplify the calculations.
Understanding your salary in Cyprus
When you decide on your salary as a managing director, consider the various taxes and contributions that will apply:
Cyprus Income Tax
In Cyprus, your income is subject to progressive tax rates after a tax-free threshold. Here's how it works:
- Up to € 19,500 per year: No income tax
- From € 19,501 to € 28,000: 20%
- From € 28,001 to € 36,300: 25%
- From € 36,301 to € 60,000: 30%
- Above € 60,000: 35%
Social Insurance contribution
Both you and your company will contribute to the social insurance:
| Contribution | Rate | Cap |
|---|---|---|
| Self-employed individuals | 16,6 % | € 62.868 |
| Employee | 8,8 % | € 62.868 |
| Employer | 8,8 % | € 62.868 |
| Redundancy Fund (Employer) | 1,2 % | € 62.868 |
| Human Resource Development Authority Fund (Employer) | 0,5 % | € 62.868 |
| Social Cohesion Fund (Employer) | 2 % | no cap |
National Healthcare System contribution (GESY)
For comprehensive healthcare services, contributions are also required:
| Contribution | Rate |
|---|---|
| Every self-employed on his emoluments | 4 % |
| Every employee on his emoluments | 2,65 % |
| Every employer on his employee’s emoluments | 2,90 % |
| On the pension income of every pensioner | 2,65 % |
| On earning income (e.g. rent, dividends, interest, etc) | 2,65 % |
National Health System contributions are charged up to an annual income of € 180.000. This corresponds to a maximum contribution (cap) of € 4.770,00.
How it works: salary calculation example
Let's assume your monthly gross salary is € 5.000, an annual gross salary of € 60.000. The employer (your company) deducts the employee's share of social security contributions and taxes and pays the net salary as follows:
| Contributions | Monthly | Yearly | Rate (Max.) |
|---|---|---|---|
| Social Insurance | € 440,00 | € 5.280,00 | 8,80 % |
| National Health System | € 132,50 | € 1.590,00 | 2,65 % |
| Total | € 572,50 | € 6.870,00 | ⌀ 11,45 % |
The employer deducts and forwards € 572,50 of social contributions from your monthly gross salary.
| Contributions | Monthly | Yearly | Rate (Max.) |
|---|---|---|---|
| Social Insurance | € 440,00 | € 5.280,00 | 8,80 % |
| National Health Security | € 145,00 | € 1.740,00 | 2,90 % |
| Redundancy Fund | € 60,00 | € 720,00 | 1,20 % |
| HRDA Fund | € 25,00 | € 300,00 | 0,50 % |
| Social Cohesion Fund | € 100,00 | € 1.200,00 | 2,00 % |
| Total | € 770,00 | € 9.240,00 | ⌀ 15,40 % |
Your employer, in our case, your company, has to pay additional social contributions worth € 770 per month. Effectively, your company pays € 5.770 for a € 5.000 gross wage.
| Taxable Income | Tax Rate | Amount of Tax | |
|---|---|---|---|
| € 0 - € 19.500 | 0 % | € 0,00 | |
| € 19.501 - € 28.000 | 20 % | € 1.700,00 | |
| € 28.001 - € 36.300 | 25 % | € 2.075,00 | |
| € 36.301 - € 60.000 | 30 % | € 5.049,00 | |
| > € 60.000 | 35 % | € 0,00 | |
| Total | ⌀ 16,61 % | € 8.824,00 |
The yearly income tax on your salary is € 8.824,00, which is € 735,33 per month. Your employer will also deduct and forward the monthly income tax on your salary. Your final monthly net salary is € 5000,00 - € 572,50 - € 753,33 = € 3.692,17. Or € 44.306,00 annual net income.
Some interesting numbers:
- The overall tax and contribution burden on the monthly gross salary of € 5.000,00 is € 2.077,83 (41,56 %). This result includes the personal income tax, yours, and the company's social insurance contributions.
- Your personal contribution and tax burden is 26,16 % (without employer contributions).
Income types exempt from income tax in Cyprus
Cyprus offers a favorable tax regime in terms of progressive income tax rates and exemptions on various types of income. This can significantly benefit entrepreneurs and investors by minimizing their tax liability on specific income streams. Below is a list of income types that do not fall under the standard income tax in Cyprus:
Dividends and Interest
Dividends and Interest are exempt from the income tax but subject to the Special Defence Contribution. The SDC law includes dividends, interest income, and rental income:
- Dividends: 17 %
- Interest: 30 %
- Rental Income: 3 % on 75 % of gross income
Hint: Non-Domicile residents are exempted from the SDC.
Capital Gains
Capital gains tax in Cyprus is limited to gains from the disposal of properties located in Cyprus and shares in companies that own Cypriot real estate. Gains from selling shares not linked to real estate and other securities (such as bonds and debentures) are exempt from tax.
Foreign Pensions
Pensions received from abroad for past employment outside Cyprus can benefit from favorable tax treatment. A fixed rate of 5% is applicable on amounts exceeding € 3.420 annually.
Sale of Securities
Profits from the sale of securities, including shares, bonds, debentures, and others, are not subject to income tax in Cyprus, making it a lucrative regime for investors and traders.
Remuneration from Employment Abroad
For individuals employed outside of Cyprus for more than 90 days in a tax year by a non-Cypriot employer, their income is exempt from income tax in Cyprus.
Calculating your monthly salary
To determine what you should pay yourself, net or gross, communicate your preference to your assigned tax consultant. They will calculate the exact tax and contribution amounts, ensuring you and your company meet all financial obligations.
For a hands-on approach, use the Net Salary Calculator Cyprus Limited provided, simplifying these calculations. The “Advanced View” option gives you a precise breakdown of the contribution and tax burden for employees and employers.
How entrepreneurs with Non-Dom Status can benefit
Dividends in Cyprus do not fall under the income tax, but they are subject to the Special Defence Contributions and the NHS. A Cyprus tax resident with Non-Dom status, on the other hand, is exempt from the SDC. This means Non-Dom Residents only pay 2.65 % NHS on their dividends, capped at € 4.770,00 per year.
Holding 100% or most of your Limited's shares opens an exciting opportunity for solo entrepreneurs. You can forego a higher salary to pay a higher dividend once or twice a year.
Calculating with a corporate tax of 12.5 % (on profit) and applying additional NHS contributions of 2.65 % (on dividends), the effective tax burden on your dividends would be less than 15%.
A quick Non-Dom salary calculation
Based on the previous example, let us reduce our monthly gross salary to € 2500. Instead, we save € 2.500 x 12 = € 30.000 for an additional dividend. How will our overall contribution and tax burden change?
A quick check with our income tax calculator gives us the following results:
- the net salary would be € 2.096,00
- The overall tax and contribution burden on the monthly gross salary of € 2.500,00 is € 789,00(31,56 %). This includes the personal income tax and the employee's and employer's shares of social insurance contributions.
- The employee's contribution and tax burden on the monthly gross salary would go down to 16,16 % (€ 404).
- The net dividend payout would be € 25.554 (30.000*0.875*0.9735), after corporate tax and NHS.
- Our total net income would be € 50.706, compared to € 44.306,00 in the first example.
Other benefits and exemptions
Cyprus offers a temporary personal income tax exemption of 50 % for new Cyprus tax residents-employees with salaried income of € 55.000 or more.
Conclusion
Ultimately, you have to decide how much you want to pay yourself as a salary. To help you make your decision, we recommend our income tax calculator and, especially for entrepreneurs, the Cyprus Limited Simulator.
Weigh up the amount you need, the prospects of your company, and your personal goals. Also, be intelligent and monitor your overall tax burden to give yourself more room for investments or reserves in times of crisis.