The self-employed and families with stay-at-home parents are set to gain the most from tax cuts announced in Tuesday's budget, as Minister for Finance Paschal Donohoe outlined a range of modest tax cuts that will cost the exchequer some €350 million.
The changes mean that a single worker earning €45,000 a year will save €150 a year on income tax, and a further €77 on USC. A married couple with one income of €55,000 will also save €150 in income tax a year and a further €102 in USC – or about €5 a week. Savings for a self-employed person on similar earnings, however, will be about €450 due to the expansion of the earned income credit, while families with a stay-at-home parent will also see their tax bill cut by an extra €300 next year.
Announcing his range of income tax cuts on Tuesday, Mr Donohoe said he wouldn’t be drawn into making “unrealistic promises” which could risk repeating mistakes and “undermining the stability of tax receipts”.
Modest
Against this background, his tax cuts were largely as expected and modest in scope.
The main move to alleviate the tax burden of the so-called squeezed middle was to increase the threshold at which workers start paying the higher rate of income tax.
This means that a single person will pay tax at the lower rate of 20 per cent on €750 more a year from January 1st, 2019, with their tax band increasing from €34,550 to €35,300. This brings the level almost back to 2008, when the standard rate band stood at €35,400, although it is still some way shy of 2009/10, when the band stood at €36,400, a level that was sharply sliced in subsequent austerity budgets.
Married couples with one income will also benefit from the increase in the band, up from €43,550 to €44,300. Married couples with two incomes will pay the standard rate of tax on incomes of up to €70,600. The cost of these changes to the standard rate band will be €161 million a year.
“Fewer people on incomes around the national average will have any income subject to the 40 per cent rate of income tax,” Mr Donohoe said.
USC
Mr Donohoe also announced a cut in the third rate of universal social charge (USC), from 4.75 per cent to 4.5 per cent. This rate applies on incomes of between €19,874 and €70,044, and means that the top marginal rate of tax has also fallen, down from 48.75 per cent to 48.5 per cent. The top rate of USC however, at 8 per cent, wasn’t changed – or 11 per cent for the self-employed.
There were also changes signalled to boost the incomes of those on the minimum wage. To ensure that a worker on the minimum wage, who will see an increase in their hourly rate from €9.55 to €9.80 following the recommendation of the Low Pay Commission, won't see their extra earnings swallowed up by tax, the ceiling of the second USC rate band, of 2 per cent, will be increased from €19,372 to €19,874.
In addition, the weekly threshold for the higher rate of employer’s PRSI will be increased from €376 to €386 “to ensure that there is no incentive to reduce working hours for a full-time minimum wage worker”. The total cost of the USC changes were put at €123 million in a full year.
For the 80,000 or so families where only one partner works, the home carer tax credit was also increased, up by €300 to €1,500 a year. It means that families will pay €300 less in tax a year, and will cost the state €24 million a year.
Self-employed
There was also some good news for the self-employed. They will continue to pay the USC surcharge of three percentage points on incomes of €100,000 and over but the earned income credit, first introduced in January 2016, has risen by €200 to €1,350. This will save those who are self-employed €200 in tax a year, though it still lags the €1,650 PAYE credit.
Combined with the other changes, it means that a self-employed single person, earning €55,000 a year, will save about €450 a year. The full-year cost of increasing the credit is €48 million.
