Income tax adjustments and social charge to raise €3 billion

AMIDST THE myriad tax changes announced in Budget 2011, it is the adjustments to the income tax system and the related system of tax credits that will have the most significant impact on workers’ pockets.

Minister for Finance Brian Lenihan yesterday announced a radical overhaul of a system he described as no longer fit for purpose in a series of changes that will raise more than €1 billion extra for the exchequer next year.

In addition, an extra €2 billion will be raised through the health levy which will be classified under the income tax subhead.

The health levy and the income levy will be replaced by a single universal social charge.

Among the main structural changes to the income tax system is the introduction of a universal social charge and a lowering of the tax credits, which will bring low-paid workers into the tax net.

The other main change in the Budget is a widening of the tax band, meaning that more people will now pay the higher 41 per cent rate.

The upper threshold of the standard tax band for a single or widowed person has been reduced from €36,400 to €32,800; for a married couple with one income, it falls from €45,400 to €41,800, while the threshold for a married couple with two incomes will fall to €65,600 from €72,800.

While the actual tax rates remain unchanged – the Minister refrained from introducing a third rate of tax – the continued application of the income levy and health levy through what will now be called the universal social charge – together with a change in PRSI contributions – means that all tax-payers will effectively be paying more in taxes.

For example, those on the standard rate of tax will effectively be paying tax of up to 31 per cent, when changes in PRSI and the universal social charge are added to the standard 20 per cent rate.

Similarly, those paying the 41 per cent rate of tax may be liable to tax of up to 52 per cent, when the universal social charge and increase in PRSI charges are included.

Rates and thresholds for the universal social charge have also been set. Only those earning less than €4,004 per annum will be exempt from the charge.

Anyone earning over that amount will pay 2 per cent on all income up to €10,036, 4 per cent on income between €10,037 and €16,016 and 7 per cent on anything over €16,016.

This contrasts with the previous system which saw those earning between €26,000 and €75,000 paying 6 per cent in combined income and health levies.

While the changes to the levies announced yesterday generally balance out for middle-income earners, people earning less than €26,000 – who were exempt from the health levy – will feel the financial impact most strongly as they will now be liable for the combined health and income levy.

However it will not apply to those earning less than €4,000.

There have also been changes to PRSI contributions. While self-employed workers previously paid 3 per cent, this will increase to 4 per cent. The €75,000 PRSI ceiling has also been abolished.

Jim Ryan, a tax partner at Ernst Young, said that, despite the one percentage point increase in the rate of PRSI payable by the self-employed, the decision to remove the €75,000 PRSI ceiling for PAYE workers meant that self-employed workers’ tax liability would now be more in line with PAYE workers.

Because the €75,000 ceiling did not apply to self-employed workers in any case, some private sector higher earners were liable for a marginal tax rate of 55 per cent, compared to the maximum of 52 per cent that applied to PAYE workers, he said.

The other significant change to the income tax system announced in the Budget yesterday relates to tax credits.

Among the main changes outlined are:

A reduction in the employee, single person personal and one person family tax credits from €1,830 to €1,650;

A reduction in the personal tax credit for married people from €3,660 to €3,300;

The home carer tax credit, blind person’s credit and dependent relative tax credit have also been curtailed.

In addition, a total of 25 tax reliefs will be abolished or curtailed, including trade union subscriptions, approved share options schemes and benefit in kind for employer-provided childcare. Rent relief will be abolished over the next eight years.

While most commentators welcomed the introduction of the universal social charge as a way of simplifying the current system, they pointed out that the new charge raises the question as to whether the levies are in fact temporary.