Presentation to Fine Gael Meeting Cora O’Brien, Policy Director Irish Tax Institute Thursday 23 April 2015
Income tax & the tax environment for the self-employed This note provides information on:
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Total personal tax rates
The changes in Budget 2015
The extra 3% USC on all income over €100,000 earned by a self-employed person
No PAYE tax credit for the self-employed and PRSI differential for low income earners
The combined impact of both these disparities
The CGT environment for entrepreneurs
Guide to Ireland’s tax rates, bands and credits
Personal Tax Rates Our personal tax system has undergone a fundamental transformation in recent years. Ireland has the most progressive income tax system in the EU and it has become even more progressive since 2008. Marginal personal tax rates have increased significantly from 46.5% in 2008 to 52% for employees and 55% for the self-employed. The point at which Irish taxpayers become subject to high tax rates is also much lower than in other jurisdictions (at €33,800 a single person pays a 51% rate of tax). The USC has also brought more people in to the tax net as applies once a person earns more than €12,012. Some interesting facts on income tax & USC
Income tax + USC = 42% of total tax revenue in 2014. In 2007, it was 29%. USC was introduced in 2011 and has raised nearly €15 billion by the end of 2014. 856,000 income earners (39% of all earners) were exempt from income tax in 2014. Over 500,000 income earners did not pay any USC in 2014.
What are the marginal tax rates we are paying?
€40,000 income = 51% (40% Income Tax, 7% USC & 4% PRSI) €75,000 income = 52% (40% Income Tax, 8% USC & 4% PRSI) €125,000 income = 55% (40% Income Tax, 11% USC & 4% PRSI)
Why is the Marginal Tax Rate so important?
Ireland is out of sync globally International Tax Reform & substance Attract mobile talent Productivity Competitiveness
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Personal Tax Changes in Budget 2015
Income Tax Rates – 41% to 40% Marginal Tax Rates o Remain at 52% and 55% o A new 51% rate applies on income between €33,800 and €70,044 Entry Point to Marginal Tax Rates o The entry point to the top rate of income tax has been increased to €33,800 for a single person USC Measures o A new higher rate of USC (increased from 7% to 8%) applies to income over €70,044. o Extra 3% USC for self-employed over €100,000 made permanent. o Exemption level increased to €12,012 from €10,036. o Lower thresholds increased and bottom two rates reduced by 0.5%.
Budget 2015 – Everyone Gained
Single earner on €35,000 2 married earners x €35,000 (€70,000 total) Single Earner on €70,044 1 married earner on €70,044 2 married earners x €70,044 (€140,088 total) 1 married earner on €140,088
€174 €792 €747 €657 €1,494 €657
Gains were capped so that individuals did not gain more than €747 p.a. – i.e. if you earned €80,000 or €250,000, your gain was limited to €747 p.a. (or €657 for married single income couples.)
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Tax paid and effective tax rates after Budget 2015
The move towards more USC
Budget 2015 saw a shift from income tax to USC on incomes above €70,044 8% USC rate – like a new third rate of personal tax No reliefs or deductions e.g. personal contributions
Minister Noonan has expressed intention to introduce similar changes in Budget 2016
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Different Treatment of the Self-Employed Difference No. 1 - 55% marginal rate – the extra 3% USC on self-employed 1. The self-employed are subject to a marginal rate of 55% on all income earned over €100,000. 2. This arises as a result of an extra 3% USC which is chargeable on this income. 3. Approximately 11,000 taxpayers are impacted by this rate.
What is the impact of this different treatment?
Employee on €150,000 will pay €66,384 in income tax, USC and PRSI in 2015. Self-employed person on €150,000 will pay €69,534 in income tax, USC and PRSI in 2015.
That’s an effective tax rate of 44.3% for an employee and 46.4% for a self-employed person with the same level of income.
How much would it cost to remove this discriminatory treatment? It would cost €125 million in a full year to eliminate this extra 3% USC.
Difference No.2 - The PAYE Tax Credit The PAYE tax credit of €1,650 is available to all employees but is not available to the selfemployed or to proprietary directors.
Why was the PAYE tax credit introduced and limited to employees? The primary reason why the PAYE tax credit was introduced and limited to employees was to take account of the fact that, at the time, the self-employed generally had the advantage of paying tax on a prior year basis – this meant that they had a significant timing advantage. However, this logic is no longer relevant because the rules on payment dates have changed significantly since the credit was introduced. Now preliminary tax (which is typically 90% of the final tax liability) is paid in the current year. This eliminates the timing advantage and indeed requires some tax to be paid on part of profits before they have even been earned.
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How much would it cost to extend the full credit to all self-employed and proprietary directors? It would cost an estimated €470 million in a full year to extend the full PAYE tax credit to the self-employed and proprietary directors.
Minister Noonan signals intention to address the self-employed issue: Minister Noonan made very welcome comments about this issue at the Irish Tax Institute Annual Dinner in February this year: “In terms of the self-employed I have acknowledged in the Dáil that there is a difference in the income tax treatment vis a vis PAYE workers which dates back as far as the 1980s. It is an anomaly that is hard to justify at certain levels of income as there is a significant gap in the amount of tax paid. The narrowing of this gap is something that I will be examining in the context of the Budget”.
Difference No.3 – PRSI differential for low income earners
For a PAYE worker, no PRSI is paid if earn less than €18,304 p.a. (€352 per week) – once earnings go over this amount, 4% PRSI is paid on all income. For a self-employed person, no PRSI is paid if earn less than €5,000 of income p.a. – once earnings go over this amount, 4% PRSI is paid on all income and a minimum of€500 p.a. must be paid.
What is the impact of PAYE tax credit differential and PRSI differential? As a result, self-employed individuals face a higher an income tax liability across the board but proportionately speaking, the difference is more acute at lower income levels.
Comparison of Tax, PRSI and USC paid by a single person - Employee vs. Self-employed Income Level (€) 10,000 15,000 20,000 25,000 30,000
Employee Tax, PRSI + USC €0 €285 €2,045 €3,595 €5,145
Employee Effective tax rate 0% 1.9% 10.23% 14.38% 17.15%
Self-employed Tax, PRSI + USC €850 €2,235 €3,695 €5,245 €6,795
Self-employed Effective tax rate 8.5% 14.9% 18.48% 20.98% 22.65%
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Combined Impact of PAYE Tax Credit and USC differential This table shows the combined disparity of tax treatment between employees and the selfemployed at middle and higher incomes as a result of: a. The PAYE tax credit, and b. The extra 3% rate of USC. (Note: there is no PRSI differential on incomes above €18,304 p.a.) Salary Level
Effective tax rate for Employee
Effective tax rate for Self-Employed
Extra tax paid by SelfEmployed
€50,000
29.1%
32.5%
€1,650
€60,000
32.8%
35.6%
€1,650
€70,000
35.4%
37.7%
€1,650
€80,000
37.5%
39.5%
€1,650
€90,000
39.1%
40.9%
€1,650
€100,000
40.4%
42%
€1,650
Above €100,000 the extra 3% USC rate kicks in for the self-employed €110,000
41.4%
43.2%
€1,950
€120,000
42.3%
44.2%
€2,250
€130,000
43%
45%
€2,550
€140,000
43.7%
45.7%
€2,850
Grey shows the difference caused by PAYE tax credit not being available to self-employed Yellow shows the combined impact caused by the PAYE tax credit and the extra 3% USC for the self-employed which applies on all income above €100,000
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CGT and Entrepreneurs Ireland’s capital tax regime must promote growth and investment. Positive steps this Government has taken on encouraging entrepreneurship The Government has taken a number of very welcome tax measures in recent years to encourage and support entrepreneurship. These include:
Enhancing the Employment and Investment Incentive Scheme (EII). This is a key relief to encourage individuals to provide financing for small to medium sized enterprises. Improving the Foreign Earnings Deduction (FED). This is a key relief for exporters who send staff to work in key markets. Introducing a CGT Entrepreneur Relief for serial entrepreneurs. Introducing the Home Renovation Incentive to encourage the building trade. Improving and introducing a range of tax measures to support agri-business.
Further progress is needed Successive changes to the capital tax rates and thresholds have created a difficult capital tax environment for businesses to operate in.
Why is this important?
Ireland is one of the most open economies in the developed world and capital is very mobile. In the current environment of restricted bank credit, entrepreneurial investment is critical for new and growing Irish businesses. The domestic sector contributes circa 70% of jobs in the State. The Changing Capital Tax Environment 2008
CGT rate Value of transfer that can be made by parent to child free of CAT CAT rate CGT retirement relief
2015
20% €521,208
33% €225,000
20% Relief available for any investor over age 55
33% New age cap reduces the incentive to pass on business after age 66
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Tax can be a deterrent to Irish and overseas investors investing in Irish start-ups and expanding companies. Repeated change has led to uncertainty. If a decision is made by an entrepreneur not to invest, then the capital is lost for that project and may be lost from the Irish tax system entirely. Capital and income taxes are key influencers for individuals with wealth to invest. This is a population which is increasingly mobile and entrepreneurs can travel easily particularly those involved in high-tech, IT and high-performing start-ups. Irish investors who have a natural nexus with this country should be given every possible encouragement to put their wealth to work in Ireland. While we have been increasing our rates of CGT, CAT and income tax, other countries have been enhancing and promoting their offerings for the investor community. A number of countries, including the UK, France and Malta, focused on capital tax initiatives to attract business investment. This creates risks at a time when Irish investors are becoming increasingly mobile and they can make clear comparisons with tax rates applicable to their fellow investors based in other countries. The ‘National Policy Statement on Entrepreneurship in Ireland 2014’ published by the Department of Jobs, Enterprise and Innovation recognised the impact of these changes: These increases in CGT rates create a challenge for Ireland’s competitiveness. They have been made during a period in which many other countries have gone in the opposite direction, enhancing their competitiveness as a location for entrepreneurial activity by significantly improving their tax treatment of capital gains. Tax reform in the UK and our geographical proximity to Northern Ireland present particular challenges. The UK Government’s actions in pursuit of its stated ambition “for the UK to be the best place in Europe to start, finance and grow a business” pose a real threat to investment, entrepreneurial drive, wealth creation and jobs in Ireland.
Irish v UK Comparison for Investors
An Irish SME technology company seeks investment to fund its expansion. It sources funding from two equity investors, one Irish-based and one UK-based
The following table illustrates the tax analysis for each investor over a 5-year holding period: Irish resident investor Marginal tax rate on 55% interest/dividend income Tax rate on exit after 5 years 33% *Assuming the investor qualifies for Entrepreneurs’ Relief.
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UK resident investor 47% 10%*
As well as the threat from international mobility, there is competition for capital from property investments which have been particularly popular in Ireland. “Irish high net worth individuals are likely to hold the majority (55%) of their wealth in property, more than in any other country globally. Only 2% of wealth is held in business/entrepreneurial interests‌â€? While the tax system has been used to incentivise investment and activity in the property and construction sector in recent times, with initiatives such as the 7 year CGT incentive introduced in Budget 2012 and the introduction of REITs, we believe that the job creation potential of the trading sector merits a similar focus. A move towards lowering our capital tax rates could help to increase the level of entrepreneurial activity in Ireland. At a minimum, Entrepreneur Relief could be improved inline with the UK model. Entrepreneur Relief
An effective Entrepreneur Relief would be welcome to provide essential certainty to business owners and investors. We welcomed the introduction of an Entrepreneur Relief in Budget 2014 as a measure to reduce the CGT cost for successful serial entrepreneurs. However, the measure introduced (and amended in Budget 2015) has some significant limitations and would benefit from a review in advance of Budget 2016. The relief is very complex and the benefits of the regime accrue too far into the future to act as a strong incentive to influence decisions made today. These restrictions are exacerbated by the availability of a simpler, clearer and more attractive relief in the UK. To compete for these investment projects, Ireland needs a simpler relief which applies a lower CGT rate to entrepreneurial gains and provides investors with more certainty about the tax regime on disposal of their investment.
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Key Tax Rates and Band/Thresholds for 2015 Personal income tax rates At 20%
At 40%
Single Person
€33,800
Balance
Married couple (one income)
€42,800
Balance
Married couple (two incomes)
€67,600*
Balance
One parent/widowed parent
€37,800
Balance
*€42,800 but can increase up to €67,600 depending on lower earning spouses’ income Key Tax Credits Single person
€1,650
Married Couple / Civil Partnership
€3,300
Widow Person Credit
€1,650
Employee PAYE Credit
€1,650
Home Carer Credit
€810
Universal Social Charge
Employee
Self-Employed
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Income
%
Up to €12,012
1.5%
€12,012 to €17,576
3.5%
€17,576 to €70,044
7%
> €70,044
8%
Up to €12,012
1.5%
€12,012 to €17,576
3.5%
€17,576 to €70,044
7%
€70,044 to €100,000
8%
> €100,000
11%
Persons earning less than €12,012 are exempt from USC Persons with a medical card/aged over 70 who earn less than €60,000 pay a top USC rate of 3.5%
PRSI Income
%
Income less than €365 a week
4.25%
No Income Limit
10.75%
Employee
All income *
4%
Self-Employed
All income
4%
Employer
* Employees earning €352 or less per week are exempt from PRSI. From 1 January 2014, employees must pay PRSI on non-employment income.
Local Property Tax Market Value less than €1,000,000
0.18%*
Market Value greater than €1,000,000 -
On first €1,000,000 On value greater than €1,000,000
0.18%* 0.25%
*Some local authorities have reduced the LPT rate by between 1.5% and 15%. The local authorities who reduced the LPT rate for 2015 are as follows: Local Authority Louth County Council Limerick City and County Council Longford County Council Mayo County Council Westmeath County Council Kildare County Council Cork County Council Cork City Council Clare County Council Dublin City Council D/L Rathdown County Council Fingal County Council South Dublin County Council Wicklow County Council
LPT Rate reduced by 1.5% 3%
7.5% 10% 15%
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Capital Gains Tax Rate
33%
Annual Exemption
€1,270
Capital Acquisitions Tax Rate
33%
Thresholds -
Group A
€225,000
-
Group B
€30,150
-
Group C
€15,075
Stamp Duty Commercial and other non-residential properties
2%
Residential property -
properties valued up to €1,000,000
1%
-
excess consideration over €1,000,000
2%
Deposit Interest Retention Tax Rate
41%
Value Added Tax Standard rate
23%
Reduced rate
13.5%
Second reduced rate
9%
Flat rate for unregistered farmers
5.2%
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Irish Tax Institute Longboat Quay Grand Canal Harbour Dublin 2 Tel.: +353 1 663 1700 Email: info@taxinstitute.ie Website: www.taxinstitute.ie