Tax Injustice: Sole Traders in Ireland
The Irish government spends lots of money trying to support people who want to start their own business. For example, there are enterprise boards that run subsidised courses, organise networking events and offer financial and mentoring assistance etc. Even before I started freelancing, I was used to seeing adverts for “start your own business” talks and small business networking groups. Such resources are extremely valuable and most welcome, but if the government is so keen on fostering start-ups, why does the Irish tax system make self-employed people pay considerably more tax than a PAYE worker with equivalent income?
When I first looked into doing some freelance web development work, I rang Revenue to find out what the tax implications would be for a PAYE worker earning some self-employed income. It would be no big deal, I was told. I would just have to make a tax return each October, and pay the tax on my self-employed income. The lady I spoke with kept stating that Revenue were really only concerned with what my overall income was, rather than how I earned it. That made sense to me and all seemed right with the world.
However, Revenue does care about how you earn your money. If you have a normal PAYE job and earn some self employed income, you are treated much the same as a standard PAYE employee. However, once you leave the safer, more predictable world of PAYE employment behind, and fully commit to running your own business, you lose your PAYE tax credit. Single people in Ireland are currently entitled to a personal tax credit of 1760 euro, but PAYE workers get an additional credit of 1760 euro. This means that while a lowly paid PAYE worker earning 17,600 euro per annum gets off tax free, a sole trader with the same income (assuming no expenses) has to pay 1,760 tax.
It is not all bad news for sole traders. Unlike PAYE workers, they only have to pay tax once a year, and new businesses do not have to settle up until year 2. You can also claim some tax relief on business related expenses. However, these minor perks are not any justification for why PAYE workers are treated far more favourably than sole traders by the Irish tax system. I’m not arguing for tax breaks for the self-employed; merely for equal treatment. Given the increased time and effort sole traders must put into managing their tax affairs alone, surely that’s not too much to ask. Such an initiative would be of significant help to the many start-ups that struggle with cash flow problems. Last year’s budget made things more unfair by increasing the PAYE credit far more than the personal tax credit. With the tightening of belts this year and far bigger fish to fry, I doubt that the Minister for Finance, Brian Cowen, will remedy this in December. I’ll just be keeping my fingers crossed that it won’t get any worse.
November 25th, 2007 at 4:19 pm
It is unlikely that there will be any tax changes in Budget 2008 tbh - it will probably be minimal all round!
November 27th, 2007 at 10:27 am
Good to see wysiw…..I mean Homespun back in the Blogosphere!
“why does the Irish tax system make self-employed people pay considerably more tax than a PAYE worker with equivalent income?”
- cause they think you are pocketing a lot more than u declare….just like they are
December 10th, 2007 at 7:06 pm
Thanks for the sympathy Justin!
Fox girl, you were right as usual - the budget was a bit of a non event. Now the poor self-employed grafters are 80 euro more worse off than the equivalent PAYE person, but it could have been a lot worse.
January 3rd, 2008 at 12:45 am
Ah please - remember you can claim lots of expenses as a self employed - such as Uniforms - give yourself a uniform which is defined somewhere (with or without a motif) and your cleaning bills are covered,so are professional meetings and memberships, Lease yourself your own car / or claim for travel keep receipts and claim for anything such as fuel and insurance which is for work like your PC - it doesnt have to meet the same standards of test as PAYE workers of “Completely and exclusively required for work” and of course your accountants fee to help you claw back even more!
and do you still have the lower rates of National insurance over there ?
January 8th, 2008 at 10:29 am
Hi Paddy, self employed people are only supposed to claim expenses that are exclusively business related too. I hear what you are saying, and of course there is abuse there, but why should people who follow the rules be penalised? I have very few expenses I can claim and I can only claim 20% of the cost of anything business related back. Therefore, I would need to have 9000 expenses in a year to get the same benefit of tax credit that a PAYE worker gets. When your turnover is low, you keep expenses to a minimum. As for insurance, self employed people pay 3% PRSI and most pay a 2% health levy, totalling 5%. PAYE workers pay 6%, but get a lot more benefits for that. Personally, I wish I could pay the extra 1% and at least get some useful benefits e.g. I would be able to avail of a free dental check up and cleaning every 6 months if I was a PAYE worker.
May 29th, 2008 at 2:55 pm
I’ve recently started contracting as a sole trader can u give me more info ?? any other expenses i should be claiming for etc.
July 7th, 2008 at 10:45 am
allo allo Ms. Janine…
I just started up as a self-employed musician a year ago. I’m trying to figure out my tax situation right now, and it’s *really* good to hear another self-employed creative cailin discussing it! (There are very few of us out there.) Love the blog…will stop deviating and get back to revenue.ie now, but thanks for the human touch in my dark morning of accountancy.
U