Deposit income - is it liable for PRSI or not?

Q Your reply to Mr LMcQ on 21/2/2011 contained incorrect information. Deposit interest has always been potentially liable for PRSI as well as the health levy.

The only circumstance in which the health levy and not PRSI was payable would have been where the income for the tax year exceeded the PRSI ceiling.

Now that the ceiling has been abolished for 2011 onwards, PRSI is payable on all deposit interest earned by an individual who pays PRSI on any other income, bringing the effective DIRT rate to 31 per cent in most cases.

You are however correct in stating that the universal service charge (USC) does not apply to deposit interest (as neither did the income levy previously).

- Ms SMcM, e-mail

A

The situation with Deposit Interest Retention Tax (DIRT) is not helped by the paucity of detailed information readily available.

What is clear is that the Revenue views DIRT as full and final settlement of liability to tax on deposit interest.

The situation is muddied, however, by the Revenue’s interpretation of things like the health levy, PRSI and such. Strictly speaking, these are not taxes and therefore not of interest to the Revenue.

Of course, to the ordinary taxpayer, a deduction is a deduction no matter what you call it and they would certainly see levies (and indeed the USC to which you refer) as a tax.

The situation is further complicated by your employment status.

My understanding, having spoken to several tax practitioners, is that while DIRT may be the final settlement of tax liability, deposit interest up to this year was also liable to the health levy (generally at 4 per cent).

As I have stated previously, this passed unnoticed for most PAYE taxpayers because they do not file tax returns and therefore are never made aware of the need to declare deposit interest (and pay a health levy on it).

Contrary to your view, however, most people are not and have not been liable to PRSI on deposit interest, other than the health levy.

People who receive income through employment (ie, PAYE) or pension income alone are exempt from PRSI contributions on deposit interest.

People who are deemed to be self-employed on the other hand are obliged to make PRSI contributions on a range of other income, including investment income – which is defined as including deposit interest.

So the question then is whether being in receipt of a small amount of income outside the PAYE net – and subsequently being obliged to file a tax return – suddenly makes one self-employed when it comes to assessing liability to PRSI on deposit interest.

Apparently not.

Social welfare legislation makes provision between “earned” income and “unearned” income.

If you have the former, you are self-employed for the purposes of PRSI contributions on deposit interest.

Unearned income, however, is deemed to include things such as rental income or deposit interest.

If that is the only outside income that a person in PAYE employment, or in receipt of a pension has, they are “excepted” from making self-employed PRSI contributions on that income.

Simple, isn’t it? . . .anything but.

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Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com