Overhaul of PRSI system was evaluated

The removal of the ceiling on PRSI for employers and the self-employed was only part of a package which could mean employees facing higher PRSI bills next year.

A complete overhaul of the PRSI system was considered in the run-up to the last Budget. If completed, it would mean the abolition of the employees' PRSI ceiling in the forthcoming Budget in September or October, potentially costing some higher earning employees hundreds in additional taxation.

The Tax Strategy Group, comprising senior civil servants and Government advisers, examined a fundamental reform of the system involving the abolition of the employee, self-employed and employer annual earnings ceilings. Documents obtained under the Freedom of Information Act showed the group also considered a reduction in the standard employer rate of 11.3 per cent to 10.3 per cent, costing £158 million.

In the December Budget, the Minister for Finance, Mr McCreevy, abolished the ceiling for employers and the self-employed amid much criticism from IBEC and individual employers.

IBEC has been pressing for a reduction in the rate of the sort considered by the advisory group to compensate employers affected by the removal of the ceiling.

The papers show that the group expected criticism but the papers point out that, following a large increase in the ceiling in Budget 1999, there were almost no representations from individual employers, although IBEC did object.

"There is no evidence that the increase in that year affected inward investment or employment creation generally. Account must also be taken of reduction in the levels of corporation and other taxes on business in recent and forthcoming years."

But it did find that abolishing the employers' ceiling would have implications for business, particularly in financial services and information technology where there are large numbers of higher earners.

The group considered abolishing the employee ceiling which, it said, would make the system more progressive. "The Department is of the view that the employee PRSI exemption should be phased out."

Under current rules, the first £87 a week is exempt while the weekly upper earnings limit has moved to £575 from £535, equivalent to £29,900.

It noted that the PRSI holiday at the end of the tax year, where employees who earn over the upper limit do not pay PRSI, had the effect of masking Budget day tax changes. If the ceiling was abolished, employees would pay PRSI all year and Budget day changes would be more noticeable in pay packets.

The abolition of the 2 per cent health levy was considered as a compensating measure.

This would eliminate poverty traps, reduce complexity and remove incentives for employees and employers to operate informal wage supplementation, according to the documentation. But it is expensive and would limit the opportunity to implement other tax-cutting strategies.

The moves were considered in September but no particular conclusions were reached. The group found the abolition of the health levy was the best option but it would have to be phased in.