Standard rate income tax threshold rises €3,200 to €40,000

Budget 2023: 2% USC band extended to ensure minimum wage earners not adversely impacted

Single taxpayers will see their take-home income improve by €640 next year as the Government has increased the upper limit of the standard income tax rate band.

Minister for Finance Paschal Donohoe said 20 per cent income tax rate would be extended to cover income up to €40,000 for a single person, up by €3,200 from €36,800 this year.

There will be pro-rata changes to the thresholds for people who are married or have a civil partner. The measure will cost the exchequer €1.065 billion next year and €1.226 billion in a full year.

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“One of my core objectives in Budget 2023 is to ensure that workers do not find themselves in a position where they pay more income tax solely because of inflation,” Mr Donohoe said.

The increase in the standard rate band is significantly ahead of the €1,300 increase in the band this year. It had not changed at all for three years prior to that.

The Government also made expected changes in the universal social charge (USC) thresholds. The Minister said the upper income limit for those paying USC at 2 per cent would rise from €21,295 this year to €22,920 next year in a move which will cost €67 million next year and €77 million thereafter.

This is designed specifically to ensure that people on the minimum wage will not find themselves paying USC at the higher rate of 4.5 per cent. It takes account of the recently announced 80 cent an hour increase in the minimum wage to €11.30 per hour from January next from its current rate of €10.50 an hour.

Knock-on benefit

However, it will clearly also have a knock-on benefit for higher wage earners as more of their income falls into the lower rate band. They will be better off by €40.63 annually as a result.

The first €12,012 of income will continue to be subject to USC at 0.5 per cent. The 2 per cent rate which applied on the next €9,283 of income this year will now cover €10,908 of pay up to an overall annual income of €22,920, up from €21,295.

Mr Donohoe said he would again extend a provision that means medical card holders pay USC at a reduced rate if their annual income is lower than €60,000.

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In line with Government guidance ahead of the budget, there are no changes this year in PRSI thresholds or rates. The Coalition has committed to examining changes in PRSI that will be necessary as a result of the decision to keep the State pension age at 66, with provision for those who wish to defer the pension to 70 to be paid at modestly higher rates.

It is awaiting a regular five-year report on the state of the Social Insurance Fund from which State pension and other welfare payments are made. The report is expected to assess the impact of the recent decision on retention of the current State pension age.

In addition to the income tax and USC changes, the Minister announced increases in a range of income tax credits.

From next year, the personal tax credit, PAYE employee tax credit and earned income tax credit for people outside the PAYE system will all rise by €75 a year to €1,775 from €1,700 this year.

Mr Donohoe also announced a €100 increase to the home carer credit in 2023, bringing it up to €1,700 annually.

Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times