We have debated this issue across a number of threads but Brendan asked me to set out my argument in a separate thread.
By way of a simple example, let's assume an investor with PAYE income of €33,800 and net rental profits of €4,000. Let's further assume that the investor earns €4,000 gross interest on his cash deposits.
It is obviously the case that every Euro of income above the relevant ceiling will attract income tax at the marginal rate, plus USC and PRSI at the applicable rates. In the case of a single person without dependant children, that means that every Euro of income above €33,800 will be subject to income tax at a rate of 40%, plus PRSI at a rate of 4%, plus USC at a rate of 7% (i.e. a combined, headline rate of 51%).
On this basis, the common perception is that the net rental profits in the above example are taxed at a rate of 51% (the headline rate), whereas deposit interest is only taxed at a rate of 45% (i.e. DIRT at a rate of 41%, plus PRSI at a rate of 4%).
However, in my opinion it is more accurate to use the average (or effective) rate of income tax that applies across an investor's total income, rather than using the headline rate, when comparing investment income that is subject to income tax (such as net rental profits) and investment income that is subject to a flat rate of tax (such as deposit interest).
In preparing the investor's tax return, the PAYE income and net rental profits are aggregated and the total amount is then taxed on a tiered or progressive basis, having applied the appropriate credits and reliefs.
The investor is not taxed at one rate on net rental profits and a different rate on his salary - he is taxed on a blended basis on his composite income (i.e. the different sources of taxable income are entirely fungible). As such, it is more accurate, in my opinion, to use the average (or effective) tax rate on all taxable income in contrasting the taxation of the €4,000 in net rental profits with the €4,000 in deposit interest.
In the example above, the effective income tax rate is likely to be around half the headline rate (the precise rate will depend on reliefs claimed).
In contrast, DIRT is levied at a flat rate on all €4,000 of the deposit interest. DIRT is not levied on a progressive or tiered basis and therefore the effective tax rate on the gross deposit interest (including PRSI) is simply 45%.
By way of a simple example, let's assume an investor with PAYE income of €33,800 and net rental profits of €4,000. Let's further assume that the investor earns €4,000 gross interest on his cash deposits.
It is obviously the case that every Euro of income above the relevant ceiling will attract income tax at the marginal rate, plus USC and PRSI at the applicable rates. In the case of a single person without dependant children, that means that every Euro of income above €33,800 will be subject to income tax at a rate of 40%, plus PRSI at a rate of 4%, plus USC at a rate of 7% (i.e. a combined, headline rate of 51%).
On this basis, the common perception is that the net rental profits in the above example are taxed at a rate of 51% (the headline rate), whereas deposit interest is only taxed at a rate of 45% (i.e. DIRT at a rate of 41%, plus PRSI at a rate of 4%).
However, in my opinion it is more accurate to use the average (or effective) rate of income tax that applies across an investor's total income, rather than using the headline rate, when comparing investment income that is subject to income tax (such as net rental profits) and investment income that is subject to a flat rate of tax (such as deposit interest).
In preparing the investor's tax return, the PAYE income and net rental profits are aggregated and the total amount is then taxed on a tiered or progressive basis, having applied the appropriate credits and reliefs.
The investor is not taxed at one rate on net rental profits and a different rate on his salary - he is taxed on a blended basis on his composite income (i.e. the different sources of taxable income are entirely fungible). As such, it is more accurate, in my opinion, to use the average (or effective) tax rate on all taxable income in contrasting the taxation of the €4,000 in net rental profits with the €4,000 in deposit interest.
In the example above, the effective income tax rate is likely to be around half the headline rate (the precise rate will depend on reliefs claimed).
In contrast, DIRT is levied at a flat rate on all €4,000 of the deposit interest. DIRT is not levied on a progressive or tiered basis and therefore the effective tax rate on the gross deposit interest (including PRSI) is simply 45%.
