Budget 2017: Move towards rehabilitation of the many self-employed
Between the acme of the boom in 2007 and the nadir of the bust in 2011, tax receipts from the self-employed were halved. That cold statistic masked the hardship of people going out of business, often in the building trade and small service providers such as restaurants and guesthouses.
The economic recovery heralded a recovery for the self-employed sector but the tax treatment remained harsh. Budget 2016 started the process of fairer tax treatment; Budget 2017 is continuing it. Compared to other taxpayers, the self-employed face three disadvantages.
The first disadvantage is that they pay more tax than employees. Employees get a PAYE tax credit, worth up to €1,650 per year, just for being an employee. Self-employed people don’t. The effect of the earned income tax credit is to level the playing field. Budget 2017 has increased the earned income tax credit to €950 from €550. That’s not the same as the PAYE tax credit, but it’s moving in the right direction.
The second disadvantage the self-employed face is that they pay more USC than employees. While the majority of income earners benefit from the USC cuts announced by the minister, some benefit less than others. That’s particularly the case for successful self-employed people earning over €100,000 per annum. Those 35,000 or so people pay an eye-watering rate of 11% USC on the top part of their income. You may or may not feel sorry for people in that fortunate position, but irrespective of that, surely people should be taxed on how much they earn, not how they earn it?
The third disadvantage is that self-employed people don’t get the same benefits from the social welfare system as employees. The 4% PRSI which all taxpayers pay buys employees a range of benefits which are not available to the self-employed. While the self-employed are entitled to a contributory pension and maternity benefit, they cannot avail of cover for several other schemes and benefits. Budget 2017 starts to change this.
PRSI receipts from employees, the self-employed and employers go in to a Social Insurance fund, out of which the various social welfare benefits are paid. Contributions by employers, typically at 10.75% of wages, dominate the total amounts paid in and this explains why employees traditionally are better off in terms of benefit entitlement.
Budget 2017 is allowing for the first time improved access to the benefits from this fund for the cohort of the self-employed. It may not appear much at first sight but this is a radical innovation in the workplace. Not increasing self-employed PRSI while enhancing the benefits may be the most important tax element of Budget 2017.
