How people on different incomes may pay more tax

The average worker could pay up to 1 per cent more in income tax next year as the impact of Wednesday's Budget starts to be felt.

The decision not to increase tax bands in line with the Consumer Price Index means that moderate pay rises will be heavily taxed and the increases in take-home pay will be less than inflation.

Tax - as a percentage of pay - will rise by between half and one per cent for most workers, according to figures compiled by PricewaterhouseCoopers for The Irish Times.

The calculations show that even if workers receive pay rises of 5 per cent in 2003, the gains will be eroded by tax and inflation.

Traditionally, tax bands are increased in line with inflation in the Budget every year. This ensures that the proportion of people's salaries incurring tax at the lower rate of 20 per cent remains constant as their wages rise in line with inflation. This year, the bands after which the higher 42 per cent tax rate are payable, was left unchanged.

The three accompanying illustrations show that - assuming they get a 5 per cent pay rise - the average employee will end up paying more of their income in tax next year because the proportion of their salaries attracting tax at the higher rate will rise.

In addition, the percentage increase in monthly take-home pay is less than the projected rate of inflation for next year of 4.8 per cent.

The net result is that people will be significantly worse-off in real terms.

The first example - Brian and Sarah - are in their forties and live in Cork with their two teenage children. Brian works in a bank, earning a salary of €40,000. He makes pension and AVC contributions of €300 each month.

Brian has both a company car and a small preferential loan from his bank. Sarah, meanwhile, works part-time and earns €20,000.

The table shows that Brian and Sarah will pay 21.29 per cent of their income in tax next year after they receive their 5 per cent pay increase.

This compares to the 19.95 per cent they would have paid had their income remained static, or the tax bands increased in line with inflation and pay rises..

Their net salary will grow by 3.51 per cent when the impact of their pay rise is felt. This will, however, be nullified by inflation, which the Department of Finance expects to average at 4.8 per cent in 2003.

Liz (25) is single and shares a house in Dublin. According to the table, Liz will see the percentage of her salary paid in tax next year grow from 18.01 per cent to 19.45 per cent when she gets her pay rise.

Her net monthly salary will rise by 3.18 per cent when her new wages come through, but this will, again, be cancelled out by inflation, leaving her with less money to spend.

Our high-income couple, David and Christine, will do best out of the Budget after their pay increase, but will still feel no benefit in real terms.

They will now pay 19.86 per cent of their salary in tax, compared to the 19.33 per cent they would have paid if their wages had not grown.

Their net salary will increase by 4 per cent, still less than the expected rate of inflation. David and Christine manage to escape the worst of the fiscal drag because Christine's pay increase will not push her into the higher tax band, and she is not liable to the 2 per cent health levy.