Higher earners face bigger tax bill under plan to cut PAYE credit

Higher earners could pay more tax on a significant portion of their income if the Government goes ahead with a plan to stop them receiving a PAYE tax credit.

The move has been promised by the Government as one of a range of measures to claw back gains from the better-off from promised cuts in the USC. However, it could mean hundreds of thousands of workers paying tax of close to 70 per cent on a slice of their income, according to an analysis by the Irish Tax Institute.

The PAYE tax credit is worth €1,650 and all individuals earning income taxable under the PAYE system are entitled to it. The Government has indicated that it will be removed from higher earners but has not given details.

The Irish Tax Institute says that if it were removed from those earning over €70,000, then 277,000 individuals would be affected. If the income threshold is €80,000, this would affect 203,000 individuals. It says that it is likely that the credit would be tapered out above a certain income level on a sliding scale.

Warning

However, it warns that this could lead to a big increase in the marginal tax rate – the amount of every extra euro earned that goes in tax – for a portion of income. If the credit is tapered out for income earned between €70,000 and €80,000, then the marginal rate of tax paid on income in this €10,000 band will be 68.5 per cent, it says. This would be far in excess of the 52 per cent marginal rate now applying to higher earning PAYE taxpayers.

The institute warns that this would hit competitiveness and would mean those earning €75,000 here would pay more tax on income than individuals in Paris, Stockholm, Madrid and London. They pointed out that Minister for Finance Michael Noonan had said that a separate “solidarity levy” is planned for higher earners to compensate for USC cuts, meaning that the removal of the PAYE credit could be another imposition for higher earners. However, the Government’s precise plans are not clear.

The Minister for Finance has previously said that the intention is that everyone will gain fron income tax and USC changes , but that the gains would be proportionately less for higher earners.