Who pays more income tax, workers in the Republic or in the North?
In terms of taxes and benefits, it has long been assumed that working in Northern Ireland is better than collecting unemployment benefits or a state pension in the Republic, not that you can do both. The jobseeker’s allowance here is €208 per week while the basic state pension is €248.30.
These fares are considerably better than their equivalents north of the border – £77 (€91) and £129.20 respectively – even taking into account currency exchange differences and the cost of living. The Republic’s state pension – in terms of purchasing power parity (PPP), a measure devised by the OECD that compares purchasing power (in dollars) between jurisdictions – is $304.29 , or about 1.7 times the Northern equivalent ($180.45).
Why these basic social protections are stronger in the Republic is an open question – it used to be the other way around – but they have been reduced by successive UK governments since the Thatcher era of the 1980s. Conversely, rates welfare in the Republic were maintained at relatively high levels even during the period of austerity following the 2008 financial crisis, a point rarely acknowledged by the left.
Income tax systems raise a different set of issues. The relatively modest income levels at which workers in the Republic are beginning to pay the highest rate generate near-universal resentment and are unquestionably out of step with peer countries, including the UK. The higher rate of tax (currently 40%) in the Republic applies to all gross taxable income over €36,800 for a single person (Central Bureau of Statistics 2020 figures establish average time wage full at €49,000). In addition, a PRSI rate of 4 percent applies, as well as the universal social charge of up to 8 percent for employees, depending on your income level. Those earning less than €13,000 are exempt from USC.
Business groups say “high rate meets low entry point” effectively penalizes labor and undermines the Republic’s competitive bid. Workers in the UK (and Northern Ireland) only pay the highest rate at income levels above £50,271.
Tánaiste Leo Varadkar and Finance Minister Paschal Donohoe insist that reducing the tax burden on workers remains a central objective of the government. Events – Brexit, Covid-19, rising inflation – continue to hamper, of course. Either way, the low entry point appears to provide an advantage to workers north of the border. Hence the conclusion that workers in Northern Ireland – at least in fiscal terms – are better off.
Income tax, however, is only part of the tax equation for workers. What is rarely taken into account in these comparisons is the social insurance component. A new study comparing the tax and benefit systems of the North and the South shows that when this is included, certain cohorts of workers in the Republic pay less tax on average than their counterparts in the North.
Queen’s University scholar Mike Tomlinson’s study – titled Social Security in a Unified Ireland and published in this month’s issue of the academic journal Irish Studies in International Affairs as part of the Analyzing and Researching Ireland project North and South – examines income tax/welfare issues relating to a united Ireland. In other words, who would win and who would lose in a unified system.
Tomlinson comes to his conclusion by looking at the gross income of various Northern wage earners and comparing what they currently pay under the UK tax code and what they would pay if the Republic system applied.
The poorest 10% of workers in the North, those with a gross salary of €387.40 per week, pay €43.80 in taxes, a combination of €20.80 in income tax and 23 € social insurance. In the Republic, they would pay €27.70, including €14 in income tax, €4.30 in USC and €9.40 in social insurance.
Middle income workers
For people with average incomes with 630 € weekly, the tax advantage of the code of the Republic is more important. Workers currently pay €121.40 in tax under the UK code, including €69.30 in income tax and €52.10 in social insurance. If the Republic system applied, they would pay €101.60, including €62.50 income tax, €13.90 USC and €25.20 PRSI, or 16% less.
His study finds that all income groups except the top 30% would end up paying less tax in the Republic system, debunking the idea that most workers would be better off working in the Republic. north of the border.
“From an employee perspective, the overall differences between the Irish and UK tax codes [including social insurance] aren’t great,” says Tomlinson.
“The South has lower insurance premiums but higher income tax plus USC deductions across most of the income range,” he says.
“Overall, most low-to-middle-income northern employees would be better off with the southern PAYE system,” he says. His study also examines the public finance implications of a unified system, concluding that using the Republic tax code would result in the collection of an additional €769 million in taxes in the North.
This is mainly due to the increase in tax on high incomes and the increase in employers’ social security contributions. Tomlinson’s paper is just one of many recent studies aimed at examining the economic and financial implications of a united Ireland, a concept that had received little academic attention until Brexit.
That is likely to change given Sinn Féin’s success in becoming the largest party in recent Northern Assembly elections, which has put the issue of a border ballot and a united Ireland on the table. ‘agenda.