Are you paying less tax than you did 10 years ago?

Take a look back at personal taxes over the past 10 years and it's clear that, despite the stress the Covid-19 pandemic has placed on public finances, the tax burden facing Irish families is considerably lighter than it was 10 years ago, when austerity was the only game in town.

More than that, Irish families are now facing the lowest tax burden on their incomes than at any other point over the past decade.

But with inflation picking up, and a winter of soaring energy prices looking likely, any tax savings made in the years since austerity ended may be wiped out, unless the Government takes action next week.

Winners

Thanks to research compiled for us by PwC looking back over the past 10 years of personal income taxes and how it has impacted typical Irish families, it's clear that tax has fallen steadily over this period.

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Consider the experience of a single-income married couple earning €57,500. Back in 2011, they would have faced an effective tax rate of 16.3 per cent on those earnings, giving up €9,216 of their annual income in a combination of income tax, the universal social charge (USC) and PRSI.

Fast forward to 2021, however, and their tax burden has fallen noticeably. Over the intervening 10 years, it has reduced by more than 24 per cent: this means they get to keep an extra €190.49 a month in their pay cheque.

Single parents who work in the public sector, on earnings of €36,000, will also have seen a substantial fall in their tax burden over this period – of some 21.4 per cent. This is due to a substantial reduction in the amount of income tax owed over this time thanks to the widening of the standard-rate tax band. That means a family in that position now gets to keep almost €210 extra a month.

Indeed all our families have seen their tax burdens fall over the past 10 years, although some more than others.

Higher earners, for example, will have kept more of their money out of the hands of the Exchequer each month – though the increase will have been less, proportionally, than those on lower incomes.

For example, our married couple, working outside the home with a combined income of €175,000, has only seen an increase of 6.3 per cent in their take-home pay, while the increase for our married couple on €250,000 was 4.4 per cent.

This means that the former gets to keep an extra €377.26 a month, while the top earners get to keep €395.88, illustrating the progression of the Irish tax system, whereby those on higher incomes pay proportionately greater rates of tax. The tax savings for a single-income married couple earning €57,500 since 2011 is, in absolute terms, almost half that of the couple on €250,000 – even though the latter’s earnings are more than four times greater.

Pensioners have also fared well during the decade from 2011. While they are exempt from PRSI, they were hit hard with the introduction of USC, which saw their effective rate of tax jump to 6.94 per cent in 2011 and rise as high as 7.54 per cent in 2014.

Since then, however, it has come back to a decade-low rate of 5.87 per cent. This means that a pensioner couple earning €48,000 will get to keep €43.07 more every month than they did back in 2011.

Inflation

What’s striking when you consider personal taxes over the past 10 years is how some people – provided their wages have remained steady over the period of course – pay exactly the same amount in income tax as they did 10 years ago.

Consider someone earning €22,000. Back in 2010, they were giving up €740 of their annual income in income tax each year. Following that year’s austerity budget, however, their income tax burden rose to €1,100 in 2011 – and it hasn’t shifted from there since.

In 2021 their income tax burden remains at €1,100 a year, for an effective income tax rate of 5 per cent, or 10.29 per cent when PRSI and USC also apply.

But with wages expected to rise on the back of inflationary pressures, workers will end up being pushed into higher tax brackets unless tax bands rise alongside the increased pay, thus diminishing the positive benefit of a pay increase.

It’s a stealth increase and one that has hit Irish workers over the past couple of years. The last time tax bands were adjusted was in 2019 when the standard rate band rose to €35,300 for a single person and the married band to €44,300.

This is also the case with child benefit. It was increased to €140 a month per child in the 2016 budget, but hasn't shifted since.

“Indexing tax bands and credits for inflation would now be welcome to ensure that inflation-related increases don’t push lower-paid workers into higher tax bands,” says Lisa McCourt, author of the research and a senior manager with PwC.

Some form of indexing is expected, given that it was signalled in last year's Programme for Government, which said that tax bands and credits would be indexed with effect from 2022.

But while indexing may be the answer, it’s not cheap.

A new report from the Revenue Commissioners puts the cost to the Exchequer of increasing the PAYE tax credit by just €50 – to €1,700 a year – at €102 million a year, while increasing the single person tax credit by €100 would cost €103 million, and a further €153 million to increase the married credit by €200.

Widening the tax bands by €500 would cost €122 million a year, or €241 million if widened by €1,000.

A similar approach could be taken to the USC bands to keep lower earners out of the USC net. But again, this will cost. For example, if the Government sought to widen the 2 per cent band – which operates on income from €12,013 to €20,687 – up by €1,500 to between €13,513 and €22,187, it would cost €118 million in a full year.

And the Government is understood to have only about €500 million to use for tax cuts.

Property tax – an extra burden

A further tax burden that wasn't a factor in 2011 is local property tax. Since its introduction in 2013, most homeowners have started to pay sums ranging from about €90 a year on a house worth less than €100,000 up to €1,755 for a property worth €1 million – and considerably more for properties valued in excess of that.

It’s an additional tax burden that also needs to be considered. Homeowners may face an increase later this year, when the new valuation system kicks in.

Someone living in Dún Laoghaire in a home that was previously valued between €450,000 and €500,000 used to pay €726 a year; now their home is valued at €820,000, but their tax bill has risen by just €1 to €727.

On the other hand, someone living in Ennis, Co Clare, originally valued their house at €150,000, which meant a bill of €258; now their home is valued at €270,000 which means a bill of €362 a year, an increase of some 40 per cent.

And, as McCourt notes, previously exempt properties will now likely be within the charge to local property tax in 2022. This means that thousands of people will face property tax bills for the first time later this year, which could mean a sharp rise in their overall tax burden.

Remote working

It’s not quite an increase in tax burden, but it is an additional expense, and one that many people may have expected to offset through the tax system. Yes, working from home may have seen households save on commuting costs, but it has meant an increase in other expenses, such as heat and lighting.

However, the current system for claiming back expenses incurred from working from home has proven to be considerably less than fit for purpose. It requires considerable effort – collecting gas/broadband and electricity bills – all to claim back a derisory amount of, typically, less than €100 a year.

McCourt says that in this year’s budget “employee tax relief for home office equipment, a new remote working tax credit and changes to the rules for claiming travel and subsistence expenses would be helpful”.