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.