SINGLE people earning around £14,000 to £17,000 and married couples in the £26,000 to £40,000 income bracket will get the most significant gains in the 1997/1998 tax year. But mortgage holders will see some of the benefits clawed back as tax relief on mortgage interest payments is brought back to the standard tax rate. The middle income taxpayer who has no mortgage will be the biggest beneficiary of the 1997 Budget.
The reduction in the standard tax rate together with the widening of the standard rate tax band, increases in personal allowances and the reduction in the PRSI contribution rate will benefit all taxpayers. While the income ceiling for PRSI contributions has been increased from £22,300 to £23,200, the reduction in the rate for contributions from 5.5 per cent to 4.5 per cent will more than wipe out the effect of the rise in the ceiling.
Middle income earners will benefit in the 1997/98 tax year for a number of reasons:
. the widening of the standard rate taxi by £500 to £9,900 for a single person and, £1,000 to £19,800 for a married person" means that a lot more of their income will be taxed at the standard rather than the top rate. For a single person, an extra £500 of their income may be taxed in 1997/98 at the standard rate rather than at the top 48 per cent rate;
. as well as having more of their income taxed at the lower rate, that rate will be reduced from 27 per cent to 26 per cent. For someone currently paying all their tax at the standard 27 per cent rate the increase in their take home pay will be 1 per cent of their taxable income. For example the annual tax bill of a single taxpayer on an income of £10,000 will be reduced by £65.50.
A taxpayer on the top 48 per cent tax rate will get an annual saving of £94 or £7.80 per month before any other Budget measures. A single worker earning £12,000 will see a reduction of £85.50 in his/her annual tax bill, or slightly more than £7 per month before any other Budget measures;
. increases in personal allowances - £250 for a single person to £9,900 and £500 for a married couple to £5,800 reduces the amount of tax payable at the taxpayers top rate of tax. Allowances are deducted from total income to calculate taxable income, so increases in allowances mean that less income is taxed.
In the current tax year which ends in April a single person can earn up to £12,850 before moving up to the top 48 per cent tax rate. With higher allowances and wider tax bands a single person will be able to earn £13,600 before moving into the higher tax band.
A married couple can earn up to £24,900 (£25,700 if both spouses are earning) this year before becoming liable for tax at 48 per cent. In the 1997/98 tax year they will move up to the 48 per cent rate when income exceeds £26,400 (£27,200 where both spouses are earning);
. the reduction in the PRSI rate which will effectively cut contributions by £1 for every £100 payable. The first £80 of weekly income is still exempt from the PRSI levy while the income ceiling for contributions has been raised to £23,200.
Middle income earners are benefitting more than lower paid workers because they are getting the full value of the widening of the tax bands and the higher personal allowances, which will reduce the tax payable at the higher rate.
Because the income of lower paid workers will be well below the top of the standard tax band, they will not benefit from the widening of the band. But lower paid workers will benefit from the reduction in the standard rate.
However, a lower paid worker on an income of £10,000 will see a significant rise in income. This is because the taxpayer will no longer have to pay the health contribution and the employment and training levy because the income ceiling for these taxes has been raised from £9,750 to £10,250.
This will add £225 to the takehome pay of the worker on £10,000 before any other budget measure. With the other budget measures a taxpayers earning £10,000 will see a 5.4 per cent increase in net take home pay.
Overall single taxpayers in the £14,000 to £17,000 income bracket will see increases of around 4 per cent in their net income. For married taxpayers with one income in the £26,000 to £35,000 range, the net increase will range from 3.5 to 4.1 per cent.
But the changes in tax relief on mortgage interest payments will claw back some of the benefits for higher income workers. Relief in 1997/98 will only be allowed at the standard tax rate. And the reduction in the standard tax rate to 26 per cent increases the size of the gain.
In the 1993 budget the Government announced that it was cutting mortgage relief back from the top tax rate of 48 per cent to the standard tax rate over a four year period. By the next tax year mortgage relief will only he available at the new standard 6 per cent rate.
For example, the reduction in the effective rate of relief from 48 per cent in the 1993/94 tax year to 26 per cent next year will mean the annual tax bill of a married person on the maximum interest relief will increase by more than £900.
Under the mortgage interest relief rules a single person who is a first time buyer and claiming maximum interest relief of £2,500 will see their take home pay fall by £11 per month or £132 next year before any other Budget changes.
In the current year the relief at an effective rate of 32.25 per cent, boosts his/ her income by £67.18 per month. The reduction in the standard tax rate to 26 per cent means the relief is less - £54.16 per month - and will mean a £13 fall in monthly income.
If the same single person is not a first time buyer the reduction in the mortgage interest relief will mean a loss of £8.25 per, month before the cut in the standard tax rate is taken into account and £10 per month with the reduction in the standard rate. In the current year mortgage relief adds £51 per month to his/her income. This addition will fall to £41 per month next year.
For a married couple on the maximum interest relief: the changes will cost first time buyers £26.04 per month or £312.48 per annum and other buyers £19.68 per month or £236.16 in the full year.
First time married buyers on less than the top interest relief will also lose out. For mortgage holder with an interest bill of £4,000, the amount of relief will fall from £107.50 per month to £86.66 per month. This will increase their tax bill by £20.84 per month or £250 per annum.
But homeowners will benefit from the removal of residential property tax from April 5th at a cost of £16 million in a year to the Exchequer.