Will Noonan cut your tax in the budget?

In just two weeks time, we'll all be feeling that little bit richer, or poorer, depending on the outcome of Budget 2015.

Though not many kites have been flown as yet as to the particular measures we can expect, there is a definite sense that this year may finally mark an end to the austerity budgets that have characterised recent times.

Last week, Taoiseach Enda Kenny said that he wanted to use the budget to “sustain the progress” that has been made to date, and the feeling is that this year the Government might make some concession to the hard-pressed taxpayer, who has given up so much to the country’s coffers since the economic collapse in 2008.

Conor O’Brien, head of tax with KPMG, says the Government might consider that, with growth going so well, a boost of confidence to people would help propel a recovery further.

“But a lot of that will depend on how much growth is projected and the assumptions for next year. I don’t think they can make another revenue raising measure. The country has taken so much and there’s only so much blood from a stone you can get”, he says.

Andrew Gallagher, president of the Irish Tax Institute, gives his synopsis of the tax raising measures over the past few years as follows: "the very significant increases in personal tax rates [through the USC], a reduction in the tax band, the introduction of the high earners' restriction and a raft of base-broadening measures.

There have also been changes to PRSI rules which broadened the base of taxable income and eliminated the income ceiling for employees. In addition there were reductions in the main tax credits – the Personal Tax Credit and the PAYE Tax Credit”.

These measures mean that less than a quarter of those in the workforce – 23 per cent – will pay 81 per cent of the income tax this year. So it could be time for a change. But if it is coming, Ursula Matthews, senior tax manager with PricewaterhouseCoopers (PwC), argues that it will be more of a "token gesture rather than anything substantial".

What is likely to happen

As with every budget, a certain amount of the Minister’s pronouncements on October 14th will have already been signalled. These include:

USC for self-employed to fall People who are self-employed are currently paying an extra 3 per cent Universal Social Charge on earnings over €100,000, a situation many deem to be unfair. However, this is due to fall back to 7 per cent at the end of 2014.

“Self-employed taxpayers who generate jobs in the economy should not be paying higher marginal tax rates than employees,” says Gallagher, who argues that they should expire as planned.

Conversely, a special low rate of USC for medical card holders who earn less than €60,000 is due to expire at the end of 2014. The rate is set to increase from 4 per cent back up to 7 per cent.

CGT exemption for property to end Introduced in 2012, the seven-year exemption on capital gains tax (CGT) is due to end this December.

The exemption provides that no CGT is paid on any gain in value over the first seven years a qualifying property is held, once it is held for at least seven years.

Minister Noonan has already signalled that he isn’t going to extend the incentive, and O’Brien doesn’t expect any change of heart. “It’s highly probable that it will expire because the market has recovered sufficiently,” he says.

Tax holiday for start-ups For the past five years, start-ups have enjoyed a corporation tax holiday for three years.

However, this is due to end this December 31st, but O’Brien says there’s a chance that it will be extended.

Special Assignee Relief Programme Introduced in 2009, this tax incentive regime for overseas employees working in Ireland never really took off. Figures for 2012 show just 15 people took it up – compare this with the Netherlands where between 10,000 and 12,000 applications are received each year for its equivalent scheme.

Given that the current regime is due to expire in 2014, and the Department of Finance held a consultation on the regime earlier this year, change is likely. “It’s too restrictive and it’s quite difficult to qualify for it,” says O’Brien, adding, “it’s not as attractive as it ought to be”.

For O’Brien, the decision to abolish the original remittance basis of taxation back in 2006 “is the biggest industrial policy mistake I’ve seen in my career”. He is aware of many cases where FDI projects are lost by Ireland because of personal tax rates and would like the Government to introduce a more effective scheme which in turn could bring more jobs to Ireland.

Gallagher agrees. “Attracting the decision-makers and the value-creators into Ireland will be more vital than ever in the future,” he says.

“Similarly, consultations were also held on the Seed Capital Scheme (SCS); Foreign Earnings Deduction (FED), and Employment and Investment Incentive, which makes it likely that improvements to these schemes will also be introduced. Only about 100 people avail of the SCS each year, which offers tax relief to taxpayers formerly in employment who start up a business. Similarly, just 83 employees availed of the FED relief in 2013 which provides for a tax deduction for people working in qualifying countries, including Russia, India and China.

What may happen As with every budget, the devil will be in the detail – and there is always a surprise or two.

Income tax If the Minister does decide to give something back to the hard-pressed taxpayer, he has a number of options and he has already signalled that the Government will announce "a tax reform plan to be delivered over a number of budgets to reduce the 52 per cent tax rate on low and middle-income earners in a manner that maintains the highly progressive nature of the Irish tax system".

At present, those who are self-employed are paying tax at on a portion of their income at 55 per cent, and PAYE workers at 52 per cent. As O’Brien notes, “the Government is getting more than you’re getting”.

This is putting Ireland “out of sync globally” says Gallagher, noting that Ireland is rapidly heading to the top of the personal tax leagues with competing FDI countries as salaries increase (see table).

Universal Social Charge The Government could opt to cut the rate of USC which was introduced in 2011. However, O'Brien says such a move is unlikely given the revenue the charge generates.

“The difficulty with the USC is that it applies to all income so it’s a very big revenue measure. It would be much cheaper to reduce the top rate than to reduce or eliminate USC which would cost a lot,” he says, adding, “Also, economic research that would indicate that cutting top marginal rates has the biggest impact on growth”.

The USC has brought in €11 billion between its introduction in 2011 and the end of 2013 according to the Irish Tax Institute, and is expected to raise a further €4 billion in 2014.

Cutting the top rate of tax by 1 per cent would cost the Exchequer €234 million in a full year and would reduce the marginal tax rate for employees to 51 per cent.

For Matthews, however, the more likely route is for the Minister to increase the bands at which the different rates of income tax and USC apply. This would mean that the amount you can earn at the lower rate of tax (20 per cent) would increase.

Pensions Private pension funds are currently liable to a charge of 0.75 per cent, but this is due to drop to 0.15 per cent come January. Originally introduced as a temporary measure in 2011, the levy collected €2.1 billion between 2011 and 2014, with a further €135 million forecast for 2015.

It is possible that the Minister will signal his intention on this levy, which is due to expire at the end of December 2015.

“I’m hopeful it will go,” says O’Brien, adding, “it’s very very hard to justify it. Private sector workers in general have much poorer pension provision than those in the public sector, adding this levy on as well is really unfair”.

Indeed research from financial brokers group PIBA shows that the average loss of savings to a worker at retirement would be €9,500 if the rate were to continue at 0.15 per cent, while the average loss of savings would be a whopping€36,400 if it were to stay at 0.75 per cent.

Medical premiums A restriction was introduced on the tax credit available for medical insurance premiums costing more than €1,000 in last year's budget, effectively making health insurance more expensive.

With the numbers dropping out of private health cover continuing to rise,Matthews suggests that it could be relaxed this year.

Deposit Interest Rate Tax DIRT has been on an a sharp upwards trajectory for some years now, rising to 41 per cent on deposits and investment funds last year.

Given that it’s now at the marginal rate of tax however, Matthews “can’t see it rising any more”.

Home renovations Introduced this year, the Home Renovation Incentive scheme, which offers a tax credit to homeowners of 13.5 per cent on the cost of renovations in their home, is due to expire at the end of 2015. The Government may decide to extend it further.