Dáil Éireann Debate, Tuesday - 16 December 2014
212. Deputy Stephen S. Donnelly asked the Minister for Finance if he will verify the analysis recently published by Irish Small and Medium Enterprises which showed that a self-employed single person on an income of €15,000 pays eight times more tax than their employee on the exact same income and also has a lower entitlement to social welfare benefits; and if he will make a statement on the matter. [47922/14]
View answerIt is important to understand that PAYE workers and the self-employed are taxed in different ways to reflect their differing circumstances. Employees are exempt from the charge to PRSI if their income does not exceed €18,304. However, once PAYE income exceeds this threshold they are liable to pay PRSI on the full amount at 4%, thus equalising the treatment of personal PRSI contributions, on all of the income, for PAYE and self-assessed workers on incomes above that level.
Self-assessed individuals are required to pay the greater of €500 per annum, or 4% of their income, whichever is higher, and do not benefit from the exemption threshold. However, in the case of employees, their employers are required to pay a PRSI charge in respect of each employee. Thus the contribution made to the Social Insurance Fund in respect of employees is usually higher than that made by a self-assessed individual. For instance, at the specified income level of €15,000, an employer would typically be required to pay PRSI of €1,275 in respect of the employee. PRSI of €600 is payable in respect of a self-employed individual with the same income. Entitlement to social welfare benefits is primarily a matter for the Minister for Social Protection. However, it is worth pointing out that for individuals with incomes in excess of €18,304 the total PRSI payable in respect of an employee is 14.75% of salary, while the total payable by a self-employed individual is 4%.
Employees in the PAYE system benefit from a PAYE income tax credit worth €1,650 per annum, to which the self-assessed are not entitled. The PAYE allowance, as it was then, was introduced in 1980 to improve the tax progression of PAYE taxpayers and to take account of the fact that the self-employed generally then had the advantage of paying tax on a preceding year basis. The argument was also made at the time that the general scheme of allowances for expenses discriminated against employees and in favour of other taxpayers.
There have been some changes since 1980. For example, the self-employed now pay tax on a current year basis. In addition, the PAYE allowance has become a tax credit. However, there are other aspects to how the self-assessed are taxed which can be beneficial to them. For instance, there are significant timing benefits, depending on the accounting period used by the taxpayer, which are available to the self-assessed but which are not available to PAYE workers. In addition, the expenses regime for self-assessed taxpayers remains somewhat more liberal than that afforded to employees and therefore the self-employed can actually pay less tax when compared to a PAYE worker on the same income.
It is important to note that the changes to the Income Tax system introduced in Budget 2015 will benefit all those who pay income tax and or USC equally, regardless of whether they are PAYE or self-assessed taxpayers.
