CHANGES in employees' PRSI in the 1996 Budget are targeted at reducing the tax bills of lower-paid workers. But the combination of changes will mean that higher earners will pay more.
Allowing for the cancellation of the PRSI tax allowance and the other Budget changes in PRSI, the tax bill of a person earning £10,000 will fall by £48 in the 1996/97 tax year before any other Budget measures are taken into account. But the same PRSI changes will increase the tax bill of a person earning £30,000 by some £44 next year.
Lower earners benefit most from the increase in the amount of weekly income exempted from the tax because the amount exempted will be a greater proportion of their total income. In the current tax year, there is no PRSI tax on the first £50 of weekly income. Under the latest Budget changes the amount of weekly income which will escape the PRSI net will increase to £80 in the 1996/97 tax year.
A worker earning £190 a week will see his/ her PRSI bill fall from £7.70 a week to £6.05, a saving of £85.80 in a full year. In the current year just over a quarter (26 per cent) of his/her income is exempt from PRSI contributions while in the next tax year just under half (42 per cent) will be exempt from PRSI.
The cancellation of the £140 PRSI tax allowance will increase the tax bill of an earner on the standard 27 per cent tax rate by less than that of an earner on the top 48 per cent tax band. For a worker on the 27 per cent rate, the loss of the £140 tax allowance will cost £37.80, but the cost will rise to £67.20 for a person on the top tax rate.
The increase in the income ceiling for PRSI contributions will not effect low earners. But it will rise the amount of income on which higher earners will have to pay PRSI contributions. For a person earning £40,000, the increase in the income ceiling from £21,500 to £22,300 will mean a rise of £41 in his/her tax bill before any of the other PRSI changes are taken into account.
Therefore, despite the increase in the amount of weekly income exempted from the PRSI the combination of the removal of the PRSI tax allowance and the increase in the income ceiling for PRSI contributions means anyone earning more than £25,000 will pay more for PRSI cover.
The PRSI changes in the 1996 Budget will mean that a PAYE taxpayer earning £10,000 will pay £48 less tax in 1996/97 while a person earning £40,000 will pay £60 more.
1996/97 PRSI Changes:
(1) PRSI tax allowance cut to zero from £140.
(2) First £80 a week exempt (£20 a week for public sector employees). Contribution Rate: 5.5 per cent.
(3) Payment ceiling raised to £22,300 from £21,500.
1995/96 PRSI Changes:
(1) PRSI tax allowance cut to £140 from £286.
(2) First £50 a week (£10 a week for public sector employees) exempt.
(3) Payment ceiling raised to £21,500 from £20,900.
In 1995/96, the reduction in the PRSI allowance has added £39 to the tax bill of workers paying tax at the 27 per cent rate in the current tax year. Workers on the 48 per cent rate are paying £70 more in tax because of the PRSI change.
After the PRSI changes in the 1995 Budget, a PAYE taxpayer £10,000 paid £104 less in tax, but a worker earning £40,000 paid £26 more.