Jill Kerby

ENHANCED PRSI CONTRIBUTIONS VS PRIVATE MARKET INSURANCE

You need to be either very determined or very desperate to become self-employed in Ireland today.

A couple of weeks ago RTE’s Liveline programme heard some pretty horrific stories from sole traders whose lack of access to the most rudimentary social welfare benefits like unemployment assistance or disability payments has had a devastating effect on their lives.

For too many of them – middle aged tradesmen in particular who are still waiting in an upturn in the house building market, the struggle of the past eight or nine years has meant that their chances of fully recovering financially from the 2008 crash is becoming even more elusive.

Perhaps not surprising, with the election only weeks away, the main political parties are all paying lip-service to the great contributions made to the state by the 730,000 self-employed and small business owners. They claim their changes will improve their financial positions.

Self-employment/sole tradership offers pluses and minuses, though on the tax front, the downside can outweigh the positives of being your own boss, setting your own hours and control of your cashflow with the requirement to pay income tax, USC, PRSI (but not VAT collections) once a year on October 31.

You also get to offset certain business expenses against your income – if you have them – and you can make tax deductible pension contributions and some insurance premiums to reduce the net relevant earnings that are subject to income tax and USC. 

Like qualifying PAYE workers, the self employed and company directors must pay 4% PRSI contributions, but unlike them, they can only claim a more limited number of social welfare benefits, the most important of which is the universal contributory pension.  They are not entitled to unemployment or disability benefits, currently c€188 per week.

The election has provided ample excuse to the different parties to jump on the self-employed bandwagon, or at least those members of it who say they want the right to access those additional welfare benefits.

In nearly every case, the manifestos support this view, but only if the self-employed person pays the combined employer (10.7%) and worker (4%) PRSI contributions. For someone with net relevant earnings of say, €100,000, this would amount, in theory, to an extra PRSI payment of €10,750 a year on top of their compulsory €4,000.

Realistically, now many sole traders or SME owners would agree to pay such an enhanced ‘premium’ for the (non-guaranteed) state unemployment or illness/invalidity/disability payments or pensions of c€9,776 - €10,072 a year?

The discount insurance broker, John Geraghty of www.LABrokers.ie told me that there is “a lot to be said” about such payments, which can theoretically last a lifetime (or at least until the state non-contributory pension kicks in at age 66.)

He warned that the private market alternatives to protecting your income and health – income protection insurance and specified illness policies - have grave shortcomings. For example, your period of enforced unemployment or illness must meet the strict criteria set by the life companies.  Not every stroke is serious enough to trigger a serious illness tax free payment; not every incident of illness of disability is serious or permanent enough to prevent you from doing a different job, than your existing one.

That said, thousands of workers successfully claim these benefits and in the case of income protection they can get up to 75% of their income up to retirement age if needs be. Two close women friends of mine who had mastectomies successfully claimed their  €50,000 and €100,000 lump sums and said this money made all the difference to their recovery during a most worrisome and financially difficult treatment year.

According to John Geraghty, a 35 year old, non-smoking, while collar worker can buy a €75,000 income protection insurance plan (the maximum you can claim on earnings of €100,000) that pays out after 26 weeks for €125.94 per month gross. The weekly gross payment is €1,442. He/she can buy another 20 year term, €100,000, tax-free specified illness (or death as the first event) policy for €33.62 a month. Together, after tax relief on the income protection policy, the combined annual cost is €1,053 a year, say Geraghty. This is a certainly a far cry from the additional €10,750 a year that the self-employed accountant or business owner would pay if he signed up for the enhanced social welfare contributions/benefits.

Going self-employed, or starting your own business is not for the faint hearted. It means forfeiting the security of employer contributions, especially into a private pension fund. The Social Insurance Fund of direct taxation which pays out the PRSI based unemployment and illness and pension benefits remains in serious deficit. Pension benefits in particular are unsustainable and must be reformed if younger workers are ever going to claim their retirement income.

No matter what the political parties promise the self-employed, you need to just accept that in Recovery Ireland, you have to weave your own safety net.