Eoghan Murphy (Dublin South East, Fine Gael)
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To ask the Minister for Finance the reason self-employed persons pay a higher rate of universal social charge on their earnings. [57935/12]

Michael Noonan (Limerick City, Fine Gael)
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The USC was introduced from 1 January 2011 and replaced the Income and Health Levies. The marginal rate for each of these levies was 6% and 5%, respectively, or 11% in total. The marginal rate for the USC was 7%. Taken in isolation the introduction of the USC, therefore, would have had the effect of reducing by 4 percentage points the top marginal tax rates for both PAYE and self-employed income earners paying at those rates. At the same time, the PRSI ceiling for PAYE taxpayers, which then stood at €75,036, was abolished which had the result of increasing by 4 percentage points the top marginal tax rate for PAYE taxpayers. So the two changes – the introduction of the USC and the abolition of the PRSI ceiling-taken together meant that the marginal tax rate for PAYE taxpayers remained unchanged.

In the case of the self-employed, there was no PRSI ceiling as the PRSI income ceiling for the self-employed had been abolished in Budget 2001. Therefore, without further change, the introduction of the USC would have reduced the top marginal rate for these taxpayers by 4 percentage points and would have had the unintended effect of benefiting high earning self-employed income earners, resulting in some high earning self-employed income earners actually making a gain from Budget 2011 in comparison to all other taxpayers.

To avoid the situation in which the top marginal rate for PAYE taxpayers remained unchanged while self-employed taxpayers benefited from a reduction of that rate by 4 percentage points, two further changes were made. A higher rate of USC of 10% was introduced for the self-employed in respect of income in excess of €100,000 and an additional 1 percentage point was added to the self-employed PRSI rate. This restored the self-employed top marginal tax rate to 55%, (41% income tax, 7% USC, an additional 3% USC on income over €100,000 and 4% PRSI), which is where they were in 2010 and ensured that high earning self-employed income earners did not actually make a gain from Budget 2011 in comparison to all other taxpayers.

Note (i): the ‘marginal’ rate of tax equates to the top rate of tax which an individual is paying.

Note (ii): the 10% rate of USC only applies to income over €100,000. The standard rates of Universal Social Charge apply to income under €100,000 and are:

- 2% on the first €10,036

- 4% on the next €5,980

- 7% on the balance.

An individual whose total income for a year does not exceed €10,036 is exempt from USC.

Note (iii): Self-employed individuals with income of less than €100,000 and PAYE employees pay tax, USC and PRSI at the same marginal rate of 52%.