Minister decides it’s time to level the playing field

Minister decides it’s time to level the playing field

Budget 2016 has moved to equalise the tax burden between the self-employed and employees, but more needs to be done.

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Minister decides it’s time to level the playing field

Prior to the finance minister’s budget speech, self-employed taxpayers would have had three requests for the minister:

  • That they should receive the same tax credits as their employed fellow citizens. 
  • A level playing field in the combined burden of tax, USC and PRSI applying to their income. 
  • Some level of encouragement for the risk that their capital is placed at to create employment. 

Budget 2016 contained some welcome measures for self-employed individuals, although there is still some way to go to equalise their tax treatment with that of employees.
One clear disadvantage of being self-employed is the lack of an equivalent tax credit to the employee tax credit. This is currently valued at €1,650 and is available to all employees paid through the PAYE system (with the exception of certain proprietary directors). No equivalent tax credit was available to self-employed individuals.
The employee tax credit was originally introduced in the early 1980s, and was designed to compensate employees for the requirement to pay their income taxes as at the date of receipt of their employment income. This was in contrast with self-employed individuals who, at the time, only paid their income taxes in arrears on agreement of their tax position with Revenue subsequent to the filing of their income tax returns. 

Employed vs self-employed

Income level Employee tax 2016 Self-employed tax 2016 Difference Difference as % of employee tax
€50,000 €13,983 €15,083 €1,100 7.87%
€75,000 €26,482 €27,582 €1,100 4.15%
€100,000 €39,482 €40,582 €1,100 2.79%
€125,000 €52,482 €54,332 €1,850 3.53%
€150,000 €65,482 €68,082 €2,600 3.97%

However, on introduction of the self-assessment system for the taxation of self-employed people, the concept of preliminary tax was introduced, which required self-employed individuals to pay income tax in advance. No measures were taken to recognise this shift in timing. This created an anomaly in the tax system whereby self-employed people earning the same income as an employee paid higher tax on that income.
Minister for Finance Michael Noonan has sought to address that anomaly in Budget 2016 through the introduction of the ‘earned income’ tax credit. The intention is to introduce a tax credit aimed at self-employed people, equivalent to the PAYE credit enjoyed by employees, on a phased basis over three years. For the 2016 tax year, self-employed people will be allowed to claim a credit of €550 on filing of their tax return for the year, and we expect this to increase to €1,100 for 2017 and €1,650 for 2018. This is clearly a fair and equitable development in equalising income taxes regardless of employment status.
However, no progress has been made in equalising the rate of tax applying to income. Self-employed individuals continue to be subject to a USC self-employed surcharge of 3 per cent on income earned over €100,000, which does not apply to employees. It is hard to see a policy reason for a self-employed person to be subject to a higher rate of tax when one considers the risk involved for such people in starting their own business, employing people and generating tax
revenue. This should also be viewed in the context that, according to Central Statistic Office figures from 2012, 68 per cent of Irish private sector employees work for SMEs. This USC self-employed surcharge had been identified by the minister as an issue in the past, but unfortunately there was no mention of it in this year’s budget speech.
Overall, a self-employed person continues to pay more tax than an employee earning the same level of income, as can be seen in a simple comparison of the figures on the table opposite.
The inequality is particularly stark for those earning more modest levels of income, where a self-employed taxpayer bears a burden which is almost 8 per cent greater than an employee on the same income.
The continued focus for self-employed individuals is therefore likely to be that their top marginal rate of tax in Ireland is 55 per cent, compared with 52 per cent for employees. By way of further comparison, the top rate of tax in Britain for self-employed taxpayers is currently 47 per cent.
Finally, the minister deserves credit for the introduction of a relief to encourage small entrepreneurs by providing a reduced rate of capital gains tax of 20 per cent on gains of up to €1 million on the sale of business assets, with any excess taxed at 33 per cent. It is not yet clear what other conditions must be satisfied to avail of the relief.
While the introduction of the new entrepreneurial relief scheme in Ireland in Budget 2016 is a welcome development, it is a far less attractive relief than that offered in Britain. In Britain, capital gains realised on the disposal of certain businesses are taxed at a rate of 10 per cent on the first £10 million of the gain realised, and at 28 per cent on any excess.
While the measures announced in the budget are welcome, they are hopefully only the first step in addressing the imbalance between the taxation of the self-employed compared to employees, and moving the Irish regime for entrepreneurship towards a level playing field with Britain. 

What Budget 2016 said on the self- employed

“Income tax, as currently structured, means that an employee will take home a greater proportion of their salary than a small business owner or entrepreneur on the same gross income. I am introducing an earned income tax credit to the value of €550. This will be a significant benefit to small business owners right across the country, including small retailers, publicans, farmers and tradesmen. I see this measure as a first step, and further steps will be taken in future budgets, as resources permit.”
Michael Noonan, Minister for Finance 

Entrepreneurs’ CGT relief scheme

  Gains up to CGT rate Excess
Britain  £10m 10% 28%
Ireland  €1m  20%  33%

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