Equal Income Tax for Entrepreneurs
I was honoured to lead the pre-budget submission project for #StartupIreland. Our goal this year was to identify a number of “low-hanging fruit” budget measures that could reduce the friction felt by entrepreneurs as they try to get their businesses on a stable footing in Ireland. I’m re-publishing our recommendations here in serial form, so that there’s an easy version for people to read and share without having to download the entire 20 page submission.
Our first recommendations are that entrepreneurs should not have higher income taxes and fewer social entitlements than their staff.
This is the first post in the series “#StartupIreland Pre-Budget Submissions 2015”
The two recommendations below address the fact that entrepreneurs (or more precisely company directors with significant shareholdings) lose entitlement to the PAYE tax credit (even if they are on PAYE salaries), and are also automatically moved to a special PRSI class that eliminates their entitlement to job seekers allowance if their startup doesn’t pan out.
Objectively, these concerns not major issues for me personally. Although I pay more income tax per Euro than my employees, the fact that I don’t draw a competitive salary from my company costs me far more. And those few times I have been between jobs (aka startups), I have never thought to burden the exchequer by trying to claim the dole. That said, the day I found out that I wasn’t even entitled to made me feel like a second class citizen.
The real problem with PAYE/PRSI tax treatment of entrepreneurs is that it disincentivizes people from choosing entrepreneurialism as a career path. If a government wanted to specifically discourage people from starting companies, it couldn’t to a better job than taxing them more while stripping them of entitlements. Right now, anyone who is considering leaving their industry job to start a new company will get the message loud and clear: you don’t have the country’s support.
This needs to change.
Recommendation 1: Provide PAYE Tax Credit to Entrepreneurs
A typical founder is paid as a full-time PAYE employee of his/her own company, and normally has no other income. However, as proprietary directors, startup founders are not eligible for the PAYE tax credit. This means that they are taxed more than another employee on the same salary in their company. This is a specific disincentive that discourages people from becoming entrepreneurs.
Proprietary directors who are in full-time PAYE employment in their companies should be eligible to claim the PAYE tax credit.
Recommendation 2: Opt-In Class A PRSI for Entrepreneurs
Startup founders are normally employed by their own companies and have a controlling interest, which means they are categorised into Class S PRSI. Under Class S they pay employee’s PRSI, but the company does not make an employer’s PRSI contribution. Although this is cheaper for the company, it is equally expensive for the individual.
The ramification of being in Class S is that the founder is not entitled to participate in various elements of the social insurance safety net, such as job seekers allowance, illness or dental/optical benefits. Women in Class S must also accrue more contributions to be entitled to maternity benefit.
Although many experienced entrepreneurs are happy to exchange lower company taxes for de-facto removal from the social safety net, Class S PRSI is a powerful disincentive to many potential entrepreneurs. The decision to start a new company is risky enough without also losing social insurance entitlements.
Allow proprietary directors to choose whether or not they avail of PRSI Class “A” or “S”.
Coming in Part 2…
In the next part of this series I’ll post our recommendations to reform the the tax incentives that are currently in place to encourage people to startup companies. This includes proposing UK-style CGT relief for entrepreneurs, and reforming our multiple tax incentives into a single UK-style SEIS scheme.
You can stay tuned by following me and StartupIreland on Twitter.
January 30, 2015 at 2:04 pm, Peter Daly says:
I very much agree with the above as a company founder. The presumption behind the rules on PAYE Tax Credit seems to be that all entrepreneurs are running profitable companies. But for tech startups that can take quite a while so there needs to be some form of special treatment for startups and not just tech ones. More generally, we take a lot of pride here in Ireland in being entrepreneur friendly and having an excellent environment for start ups. The reality is that in many ways we are way behind the UK. The top rate of income tax kicks in here around €33k versus around £150,000 in the UK. The first £10M of gain on sale of companies is tax free in the UK. We need to urgently address these issues or we will see more people deciding to set up their next company in Tech City, London instead of Dublin