Decisions, decisions. While next October’s budget is unlikely to be at the top of new Taoiseach Simon Harris’s inbox just now, in time there will be plenty of choices to consider in conjunction with Minister for Finance Michael McGrath.
With a general election looming, Fine Gael’s new leader will want to take advantage of whatever power he has to keep voters on side. And to help in this decision-making, a new document from Revenue sets out how money could be saved by raising taxes – and what could help taxpayers by cutting them.
Tax yields – and thus tax burdens – have risen in recent years. Rising incomes means that more people are paying more tax. Average earnings this year stand at €50,250, with average income tax/USC payments of €10,258. This compares with earnings of €46,361 for 2023, and taxes of €9,310.
The figures also show a jump in higher earners. Some 194,000 people earned in excess of €100,000 in 2023; this year the figure will almost double to 356,660, with the biggest increase (19 per cent) in the €100,000-€150,000 category. These earners paid average taxes of €30,914 on their income.
Any move to woo the electorate by lowering the burden on the income tax front will be expensive, however. Cutting the standard rate of tax by one percentage point to 19 per cent would cost almost €1 billion while reducing the 40 per cent rate by a point to 39 per cent would reduce tax yields by €523 million.
While any talk of the universal social charge (USC) being temporary appears to have entirely faded away, this doesn’t mean further cuts on that front won’t be forthcoming. In last year’s budget, the 4.5 per cent rate levied on income between €22,920 and €70,044 was cut back to 4 per cent, and now only applies to earnings of between €25,760 and €70,044.
Cutting this 4 per cent rate back to 3 per cent would cost €462 million in a full year, while cutting the higher 8 per cent rate that applies to higher earners back to 7 per cent would cost €322 million a year.
Another approach would be to change the income tax bands. In recent years, the standard-rate band has repeatedly been widened to draw more taxpayers out of the 40 per cent tax net. Pushing this up from the current €42,000 to €43,500 for a single person, and the equivalent for married couples, would cost €369 million a year.
Similarly, USC bands could be widened. At present, the lowest rate of USC is charged on incomes of between €12,013 to €25,760 – but if increased to €13,513 and €27,260, it would cost €172 million in a full year in lost tax revenue for the exchequer. Another option would be to push up the level at which people hit the 8 per cent rate, from the current €70,044 to €75,045. Doing that would cost €89 million a year.
Of course things could change over the coming months and, rather than cut taxes, the Government could be looking at revenue-raising measures.
Increasing the standard rate to 21 per cent would bring in an extra €1 billion a year, while pushing the 40 per cent rate back up to 41 per cent would generate €523 million in extra taxes.
And there is always that old chestnut of introducing a third tax rate, as espoused by outgoing taoiseach Leo Varadkar back in 2022. According to Revenue figures, a third rate of tax, at 43 per cent on earnings over €80,000, would generate €835 million in additional taxes, or €556 million if applied on earnings over €120,000.
USC hikes might also be possible; according to Revenue, increasing the 4 per cent rate to 5.5 per cent would generate €462 million annually.
Bringing more income earners into the tax net is another possible approach. Latest figures show that some 1.26 million taxpayers (either single taxpayers or joint-assessed married couples) currently pay neither income tax nor USC. This is up on the same period in 2023, when some 1.14 million were outside the tax net. However, the number of taxpayers has also increased during this period, up from 3.28 million to 3.4 million this year, reflecting our growing population.
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Pensions
With auto-enrolment on the way – it is now expected to be introduced in early 2025 after the latest pushing-back of the deadline – a new rate of tax relief will be introduced for pension savers, at 25 per cent. That will be beneficial to those who may have previously been entitled to relief only at the standard rate of tax of 20 per cent but measures up poorly for those who might otherwise have got relief at a rate of 40 per cent due to being in a higher tax bracket.
Could this new approach trigger a shift in how the Government believes tax relief on retirement savings should be allocated? Currently, a maximum rate of 40 per cent relief on savings of up to €115,000 a year applies. Reducing this to 30 per cent, as per an option in the Revenue figures, would save €301 million a year.
Alternatively, the Government could look to make the current arrangement more attractive for higher earners. Increasing the limit on earnings eligible for relief to €200,000 a year would cost €43 million a year.
Inheritance taxes
Remember Fine Gael’s proposal to bring the tax-free threshold for gifts or inheritances given by a parent to their child up to €500,000? First suggested back in 2015, the reality remains far short of this stated goal, with the current threshold of €335,000 unchanged since 2019, despite a sharp rise in property prices over this period.
Harris appears to be sympathetic to claims that the family home – which now exceeds €335,000 in most parts of Dublin, given a median price of north of €400,000 – should be exempt from taxes. Back in 2015 as minister of state at the Department of Finance, he told the Dáil that he didn’t believe capital acquisitions tax (CAT) “is a tax only on the super-wealthy. It has an impact on many normal families in terms of the inheritance of family homes.”
Of course, any moves to increase the thresholds will cost the public purse.
Cutting the rate of CAT from 33 per cent back to 30 per cent would cost €24 million a year, while increasing the parent-to-child tax-free threshold to €400,000 would cost €52 million a year. Doing both would cost €71 million.
And doing so might put pressure on the “stranger” category C threshold, which is faced by single people, and couples who aren’t married among others. Currently standing at just €16,250, it is a significant revenue raiser. Increasing it to €19,000 would cost €3 million a year.
Property
Stamp duty on residential property hasn’t changed since 2010 and is currently levied at a rate of 1 per cent on the first €1 million, and 2 per cent on the excess over €1 million. Could this be a revenue-raising measure?
With property prices continuing to rise amid inadequate supply, the market might take the hit of higher stamp duty rates.
Increasing stamp duty to 1.5 per cent on sales below €1 million would bring in an additional €102 million a year.
Another option to bring in revenue would be to pitch any increases at a certain price level. Increasing duty to 3 per cent on the excess above €1 million would bring in an estimated €29 million a year. Or applying a rate of 2 per cent on the excess above €500,000 would bring in €56 million a year.
There is also an option to change the local property tax (LPT). Increasing the amount of tax levied on properties valued in excess of €1 million could be one way to bring in some funds. At present, the tax is levied at a rate of 0.18 per cent on the first €1 million, and 0.25 per cent on the portion above this. Increasing this latter rate to 0.35 per cent on the value over €1,050,000, and to 0.5 per cent on the value over €1,750,000, would yield almost €13 million a year.
Cutting stamp duty is also an option as the Government looks at ways of boosting accessibility to the housing market. The risk of course is that any reduction might just be swallowed up by a jump in prices.
Cutting the rate back to 0.5 per cent would cost €102 million a year, for example, while cutting the 2 per cent rate back to 1.5 per cent, on the excess above €1 million, would cost €14 million a year.
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