Maurice Quinlivan (Limerick City, Sinn Fein)
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88. To ask the Minister for Finance if his attention has been drawn to the fact that due to the failure to alter PRSI bands in line with the minimum wage increase in budget 2018, a person on the minimum wage earning €18,000 per annum will pay over 45% of their expected rise back in tax; his plans to introduce changes to remedy same; and if he will make a statement on the matter. [44112/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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Following the recommendation of the Low Pay Commission, the national minimum wage will increase from €9.25 per hour to €9.55 per hour in 2018. For an individual working full-time on the minimum wage (i.e. 39 hours per week), this should result in an increase to gross income of €608 per annum. A single person on the current minimum wage, i.e. with annual employment income of €18,759, pays income tax, PRSI and USC of €883 per annum. At the increased minimum wage of €19,367, they will pay €1,108 in tax in 2018. This is an effective tax rate on gross earnings of just 5.72%.

The marginal tax rate on the additional gross income exceeds the rate that might be expected of 26% (being 20% income tax, 2% USC and 4% PRSI) due to the tapered PRSI tax credit. However, this is as a consequence of the exemption from PRSI which applies on lower incomes, and which is a factor in the very low effective tax rate which still applies on the increased gross income of a minimum wage worker.

Prior to Budget 2015, a significant step effect existed in employee PRSI. At that time, once an employee’s earnings exceeded €352 per week they became liable to 4% PRSI on all their income. This resulted in an immediate additional payroll deduction of €14.08, so an increase in gross pay of 1 cent could cause a fall in net income of €14.07. The employee’s net income did not recover to pre-PRSI levels until gross earnings exceeded €372 per week.

This step effect was addressed in Budget 2016 by the introduction of a PRSI credit at the entry-point to employee’s PRSI, which is tapered out as income increases. The credit commences at income of €352.01 per week, and tapers out at a rate of one-sixth of income in excess of this threshold. The credit fully tapers out as income reaches €424 per week. The taper mechanism addresses the step effect while confining the benefit of the credit to earnings within the taper range.

While the tapered withdrawal of the credit does result in a higher marginal rate of deduction on income within the taper band, this must be viewed in the context of the overall effective tax rate on the employee’s total gross income of just 5.72%. For comparison, a single person earning €35,000, around the average wage, will have an effective tax rate of 17.5% in 2018.

Notwithstanding this step effect, it should also be noted that Ireland’s PRSI rates are low by comparison to personal and employer social insurance rates in other jurisdictions.