We had a lot of money taken away from us in the crisis years budgets. And we got a few euro back last year. However Budget 2016, to be presented on October 13th, is likely to offer a bit more to taxpayers, though there will be no going back to the pre-crisis tax levels. With an election in the offing, it will be a case of keeping it simple for the Government. And the big focus for taxpayers will be cuts in the USC – offering, Ministers believe, some relief from one of the most hated crisis impositions.
While we don’t know precisely what will happen, the overall directions have been firmly signalled. Here is what they might mean for your pocket. Last year’s budget meant an extra €10 to €15 a week for many families . This year the gains are likely to climb to €15 to €20 or more a week. So for many, the gains will be €1,000 a year or more and many more will gain around €750 a year.
USC: Of all the budget hints, the cut in USC is likely to be the most significant. The main USC rate of 7 per cent is certain to be reduced; the only question has been whether it falls to 5.5 per cent, or 5 per cent. The clear indications are that it will fall by 1.5 points to 5.5 per cent. This rate applies on all earnings from just over €17,500 per year to just over €70,000. So for every €1,000 you earn over the minimum threshold, a 1.5 point cut in the USC will save you €15 a year.
Let’s look at an example. Somebody earning €45,000 a year would gain €411 a year from a 1.5-percentage-point USC cut. The cash gains are greater the closer you get to the €70,000 maximum. Somebody right on the €70,000 figure would gain €786 a year from a 1.5-point USC cut .
Last year, steps were taken to claw back some of the gains from those earning over €70,000. This looks unlikely to happen this year. So the cash gains for higher earners will be exactly the same as those for our €70,000 earner. The 8 per cent rate applying to earnings over €70,000 is unlikely to change. There has been lobbying for the 11 per cent rate on non-PAYE income over €100,000 to be cut, as a boost to the higher-earning self-employed. Some 28,700 taxpayers pay this surcharge.
In total, according to a pre-budget briefing document drawn up by the Irish Tax Institute, 1.28 million people earn over the minimum €17,000 threshold and all of these would gain from a cut in the 7 per cent rate.
Other tweaks in the USC system are also likely. At the moment a rate of 1.5 per cent applies on earnings up to €12,012 and a 3.5 per cent on the next €5,564 of earnings. These rates could also be trimmed - by around 0.5 of a point probably - and the limits tweaked, helping the lower paid and increasing gains for all earners.
Also, anybody earning less than €12,012 a year is currently exempt from paying any USC. This figure is likely to rise, exempting more people from paying any element of the charge.Finally, there may be changes in USC and/or PRSI to ensure that some of those benefiting from an increase in the minimum wage get some cash benefit in their take-home pay.
Income tax: For most of us, USC, income tax and PRSI merge into one deduction from our pay packet. However our income tax bill is calculated separately. Change will be a lot smaller here. A key issue is that the USC cuts cost a lot, leaving relatively little to spend on other tax changes. One possible change is an increase in the income level at which people enter the higher tax rate, now €33,800 for a single earner. If it were to increase by €1,000, this would lead to a gain of €200 per annum for all taxpayers who benefit fully, which wold be those earning €34,800 or more. The same cash gain would go to everybody who benefits.
As those earning less do not gain from an increase in the standard rate band, there are likely to be some other measures aimed specifically at them. Specifically there will be changes to ensure that those benefiting from an increase in the minimum wage will actually see higher take home pay.
Specific reliefs and allowances are also likely to change, offering gains to particular groups.
The self-employed: There have been clear hints that something will be "done" for the self-employed. But what? One obvious way the tax system discriminates against this group is via the USC surcharge of 3 per cent on non-PAYE earnings over €100,000. They pay a rate of 11 per cent while higher PAYE earners pay 8 per cent. The Irish Tax Institute says that 28,700 taxpayers would benefit if this surcharge was removed. However, delivering big gains to this relatively well-off group might not play well politically. Change here may not come, or may at best be marginal.
Another option - the one likely to be taken - would be to make the PAYE tax credit of €1,650 available to the self-employed, which would benefit some 300,000 taxpayers. The indications are that this credit may be extended to the self-employed, but over a period of years, rather than immediately. The gain for 2016 could be somewhere over €500 - a significant enough sum for these benefiting.
Capital Acquisitions Tax: Again, there have been hints of changes here, specifically relating to tax on inheritances. Rates have shot up since 2008 and the thresholds for tax-free inheritances have halved. The result has been a much bigger bill, averaging almost €28,000 according to the Irish Tax Institute figures. However the most significant problem is the bill that falls due when the family home is left in a will. At the moment, for example, the tax-free threshold for a parent passing to a child is €225,000. So a house valued at €500,000 left to a single child leads to a tax bill of over €90,000. This factor has forced some families to sell the family home to pay the tax bill.
There are three ways the tax can change. The first is to cut the rate. The second is to increase the thresholds, meaning more of the inheritance is exempt from tax.This looks likely. The third is to introduce a special regime for the family home. Clearly the financial impact for families could be significant. If, for example, the threshold for a family home was to increase to €400,000, then the tax bill in our hypothetical example above would fall to €33,000.
Finally, there are also indications that the CAT thresholds will be index linked - in other words they will increase each year in line with the rate of inflation. Inflation is very low now, but this could become significant in the years ahead.
Child benefit: You don't need a ready reckoner to work out the impact of this on your pocket. In the last budget, child benefit was increased by €5 a month per child - or €60 a year. At the time, Minister for Public Spending Brendan Howlin said the Government hoped to do the same again this October.
Other benefits : There have also been hints that other specific welfare benefits will be increased. In particular, there is likely to be a further boost to the Christmas bonus for welfare recipients, kicking in this year. In recent days this has looked certain to happen. There will be an increase of about €3 in the weekly old age pension.
Not much bad news: One of the key things about this Budget is likely to be the absence of “nasty” surprises. The Government will commit to keeping the residential property tax at current levels at least until 2019, although of course a new government could choose to change this. Water charges most certainly will not rise either. And the range of silent hits on household budgets seen in recent years - everything from hospital visiting costs to big excise hikes – are likely to be very limited. However we can expect some increases in excise duties, certainly on cigarettes, where smokers could be hit with another hefty hike.
