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.

13 comments Write a comment

  1. 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 😉

  2. 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.

  3. 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 ?

  4. 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.

  5. I’ve recently started contracting as a sole trader can u give me more info ?? any other expenses i should be claiming for etc.

  6. 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

  7. I see another problem in the system… If you aremain a PAYE employee with some sole trader in come on the side your employer will be paying a Class A PRSI contribution for you (that is great) but as a sole trader you will have to pay a Class S contribution also.

    Now as you know a Class S contribution is near useless at the best of times, but its duplicaiton for you because your Class A already covers everything.

  8. Hi Ambrand,
    Thanks for dropping by. Surely you only have to pay class S PRSI on the self employed income though?

    While it’s nice that class A PRSI gets you a few perks, the idea of PRSI is to fund the social welfare system – it’s just another tax, and so it makes sense that you have to pay PRSI on all your income.

    I’d just be glad that you’re getting your class A perks – there is a lot to be said for staying PAYE and working on the side for as long as you can. It’s a cold world out there social welfare wise once you leave PAYE behind! 🙂

    I still think it would be a big improvement if the self employed at least had the chance to pay a little extra PRSI to match the PAYE rate and get all the benefits of that if they wanted.

    I think it’s only in these recessionary times when more and more find themselves self employed out of necessity, and some of the already self employed are in financial difficulties, that the public are becoming more aware of how the self employed get next to nothing out of the social welfare system here. Maybe with more awareness, it will be of more interest to voters. But with so little in the government coffers, I don’t expect to see any change any time soon!

    Enough moaning from me. Despite all the tax/social welfare drawbacks, I’m really glad I’m freelancing and feel fortunate that I’m still here after over 3 years now – touch wood! 🙂

  9. I only have a little moan to add in agreement to the fact that the public are not so aware of the “self employed getting next to nothing out of the social welfare” situation… I moved in with my partner 2 yrs ago when expecting our baby, he was self emplyed and i stopped working… with the recession he had to finish up his business before christmas… i was not entitled to anything as i lived with him, he was not entitled to anything as he was self employed and wanted to start new business (in the next month or so… thank god)…. thankfully we have managed to struggle through…. picking up work here and there to tide us by…. but the fact that there was nothing for us in those times, and the high tax bills he has had previous years, which he has always been so good with, we had a struggle… it makes me sad… 🙁 but hey! look on the bright side…. we have each other 🙂 🙂

  10. I wholeheartedly agree with what you are saying. I have been freelancing for many years and this inequity continues to annoy me. I work mostly from home, PC-based, don’t make a whole lot and keep (genuine!) expenses low (about 3500/year on average). The personal tax allowance is supposed to be some kind of subsistence minimum but it’s actually lower than the dole! Or to look at it the other way ’round: If I was on the dole, getting (2011 rate) 188/wk = 9776/yr, plus fuel allowance 640/yr > Total of 10416/yr plus medical card.
    If I ended up (after expenses, which obviously recirculate and contribute to the economy) with a taxable income of 10416 in 2011 I would be paying:
    433 € Income Tax (@20%)
    416 € PRSI (@4%)
    216 € USC (@2-4%)
    Total tax bill: 1065 € (effective tax rate of 10.2%)
    I would just about qualify for a medical card, but if I earned another 5€/wk I would not.

    I have been brought up to fend for myself and to rely on ‘the system’, i.e. the collective of citizens, only in case of absolute need. But if one gets taxed 10% on what is considered the subsistence minimum then there is certainly something very wrong.

    There should be a modest earned income credit for the self-employed.

  11. So as long as you pay paye and earn some self employed then you do not have to pay the tax of €1700 ?? as you are paying as you go ?? i am looking to free lance and am a bit overwhelmed .. if you have any advice of ideas id apprecaite it !

  12. Really glad to find this website and an interesting discussion of things that it’s hard to find info on. I’m self-employed and work almost entirely from home. A couple of questions:

    Am I allowed to claim a certain percentage of light and heat as a business expense on my tax?
    Can I claim for clothes (i.e. suits) that I use only for work?
    Can I claim depreciation on my laptop (though I use it for personal stuff as well – but couldn’t do my job without it)?

    Thanks, AC