The Government is planning to raise the threshold at which the Universal Social Charge (USC) is paid by low and middle income earners, instead of cutting the rate at which the unpopular tax is levied.
Senior Coalition sources have said changes to the USC will feature as part of a three-pronged tax package to be unveiled tomorrow by Minister for Finance Michael Noonan. The package will also embrace a cut in the higher rate of income tax to 40 per cent from 41 per cent next year. In addition, the threshold at which people enter the higher rate will rise to €33,800 from €32,800.
The tax measures were agreed last week by the Economic Management Council, the powerful Cabinet subcommittee at which Taoiseach Enda Kenny, Tánaiste Joan Burton, Mr Noonan and Minister for Expenditure Brendan Howlin settle the thrust of fiscal policy.
Although the Government has been urged to prioritise capital investment in the budget, it will say that the increase in disposable income resulting from the tax measures will provide an appreciable boost to economic growth next year.
As the Coalition takes the benefit of rising tax revenue and rising growth, the income tax measures will come in addition to increased expenditure in a number of departments.
Contrary to expectation in political circles, however, sources said a three-year tax plan to be unveiled by Mr Noonan in tandem with the budget will not lay out specific rate or band cuts for the years ahead.
Instead, it is understood that the plan will detail a list of priorities for reforming the income tax system including major changes to the USC.
This will begin next year with an increase to the USC bands, which will be specifically cast to benefit low and middle income earners primarily.
The USC is levied at three rates: 2 per cent on the first €10,036 earned, 4 per cent on earnings between €10,036 and €16,016 and 7 per cent on everything above €16,016.
It is also understood that a new relief package for water charges will comprise both a water tax credit for low income earners and a widening of the eligibility for welfare payments designed to offset the cost of water charges.
Ms Burton already planned to give a €100 payment to 415,000 people on the household benefits package for this purpose, but eligibility will be widened to include others in receipt of welfare payments.
With the Cabinet still to discuss the taxation package tomorrow morning, there is speculation in Fine Gael circles that Mr Noonan might review the controversial levy on private pension funds.
Given that capital gains tax has been increased on four occasions since the economic crash, there is further talk of measures to reduce that tax. An increase in excise duty on alcohol is considered unlikely, although the Minister is likely to increase tax on tobacco.
A big package on corporate tax, embracing the elimination of the “double Irish”, will include a commitment to introduce a “patent box” scheme if EU approval is granted for such measures.
However, Mr Noonan is likely to delay its introduction for at least a year.