NEARLY 18% OF the Irish workforce is self-employed – but is the Irish tax system treating these people fairly?
When compared to PAYE workers, the self-employed suffer lower tax credits, higher tax rates and potential problems with eligibility for the state pension.
Let’s start with the so-called PAYE tax credit – worth €1,650 to people working as employees in the PAYE sector but not available to the self-employed.
This credit has been one of the main bones of contention for the self-employed and the refusal of successive governments to give them an equal footing to employees under the PAYE system irked many.
In the most-recent budget, an attempt was made to address the disparity. From 2016, the self-employed can access a tax credit of €550 against tax on their income. The intention appears to be that this will be increased to put all workers on equal footing over the coming years.
The introduction of the €550 credit for the self-employed for tax year 2016 has been broadly welcomed, but many feel that it has not come quick enough – and there is still a difference of €1,100 in real cash compared to what an employee receives.
There is also a time delay for self-employed entrepreneurs who will not see the benefit of the credit until 2017, when they will be filing their tax return for 2016.
What about tax rates? At either end of the spectrum, both high- and low-earning self-employed people face higher tax rates compared to PAYE workers.
Self-employed entrepreneurs earning over €100,000 pay USC at a top rate of 11%. PAYE employees in the same circumstances pay a top rate of 8%.
Let’s break it down what that all means:
- With earnings of €18,000, PAYE workers pay €600 in tax while the self-employed pay €2,420 – €1,820 extra
- With earnings of €50,000 the self-employed pay €1,100 extra
- With earnings of €125,000 the self-employed pay €1,850 extra
The differences have come down from what they were in 2015, but they are still significant. The variations are caused by both the lower earned-income credit referred to above and a difference in PRSI rates – 4% for the self-employed and 0% up to €18,304 for PAYE workers.
Some argue that this is a particular hardship for people starting out in business at a time when creating a positive environment for startups and entrepreneurship has been an important target for the government.
Both the Irish Taxation Institute and the Irish Small and Medium Enterprises Association (ISME) have called for the disparities to be addressed.
Additionally, many self-employed entrepreneurs are employers themselves and pay PRSI at a rate of 10.75% on salaries paid to their staff. Could this delay or prevent startup entrepreneurs and small businesses from scaling up and taking on additional staff?
And when it comes to the state pension, even if a self-employed person has no income whatsoever – for example if their business is still at the loss-making startup stage - they still need to pay PRSI to maintain their eligibility.
However, those in the PAYE system who become unemployed maintain their eligibility for the state pension by claiming Jobseeker’s Benefit.
There is also the matter of the administrative burden that the self-employed face in complying with their tax obligations. Between regular VAT and PAYE returns throughout the year and an annual income tax return there is quite a lot of work to be done, which is often a daunting prospect for people starting out in self-employment.
In effect, the self-employed act as unpaid tax collectors for the Revenue for VAT and employee taxes and their reward is lower tax credits and higher PRSI and USC rates.
Barry Maxwell is a chartered tax adviser with C. Maxwell & Associates and Paylesstax.ie.
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