Income tax base broadened

Amidst the myriad of tax changes announced in Budget 2011, it is the changes to the income tax system and the system of tax credits that will have the most significant impact on people’s pockets.

Budget 2011 signalled a radical reform of an income tax system that is “no longer fit for purpose” according to Minister for Finance Brian Lenihan.

Among the main structural changes announced are a widening of the tax bands which will bring low-paid workers into the tax net, while the entry level to each tax band has been reduced, meaning that more people will be paying both the standard rate of tax of 20 per cent, and the marginal 41 per cent rate.

While the tax rates remain unchained and the Minister did not introduce a third rate of tax, the continued application of the income levy and health levy, which are to be replaced by a single universal social charge, 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 on 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.

New rates and thresholds for the new universal social charge have also been set. A 2 per cent charge will be put on income between €4,004 and €10,036, 4 per cent on income between €10,037 and €16, 016 and 7 per cent on anything over €16,016.

In terms of changes to the tax bands, the standard tax band for a single or widowed person has been reduced from €36,400 to €32,800; the standard rate band for a married couple with one income is reduced from €45,400 to €41,800, while a married couple with two incomes will see the standard tax band reduced from €72,800 to €65,600.

The other main change to the current income tax regime is a radical overhaul of the tax credit system. Among the main changes outlined are as follows:

- a reduction in the employee tax credit from €1,830 to €1,650

- a reduction in the personal tax credit for a single person from €1,830 to €1,650

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

- a reduction in one person family tax credit from €1,830 to €1,650

The home carer tax credit, blind persons credit and dependent relative tax credit have also been curtailed.

In addition a total of 25 tax reliefs are to be abolished or curtailed, including trade union subscriptions and approved share options schemes. Rent relief will be abolished over the next eight years.