Budget Families: Little change on the personal tax front

Has there ever been a more anodyne budget for families in Ireland? While significant stimulus has been directed at businesses, there were very few changes on the personal tax front; something many will be grateful for however, given the ongoing uncertain economic outlook and the Covid related debts the country is building up.

Indeed most of our families will see their after tax income stay pretty much the same next year, with the only change a very minor annual increase of about €20 per income earner.

But there is one winner on the tax front this year - the self employed. Yes, our self-employed hotelier will see his income increase by €191, or €16 a month, which may not be much, but is more than others will get. This is primarily due to the increase in the earned income credit from €1,500 to €1,650, to bring it into line with PAYE workers.

Gain

Of course this gain will depend on Mark and Linda’s income remaining steady; not so certain in this environment. A potentially bigger benefit then perhaps, is the impact of allowing those who file self employed tax returns to forego a payment this year. This means that cash-strapped business owners can defer payment of their 2019 balance and 2020 preliminary tax without incurring interest penalties.

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The other change on the tax front was the increase in the ceiling on the 2 per cent rate of universal social charge from € 20,484 to € 20,687. While this will benefit all workers, to the tune of about €20 a year, it was directed at low paid workers like Rebecca. Driven by an increase in the minimum wage from €10.10 to €10.20 an hour from January 2021, the move will help such employees stay out of a higher rate of USC.

However, while undoubtedly welcome, as Lisa McCourt, senior manager with PwC notes, the after-tax income of the lower paid in 2021 will still be lower than comparable after-tax income in 2010. Indeed Rebecca would have taken home €1,720 a month back in 2010, but €1,644 a month from January 2021.

Given that Rebecca is currently on the Pandemic Unemployment Payment, the decision to extend the Christmas bonus to such recipients will be welcome - even if she hopes to be back in work by December. If she is, the news that she will be able to earn up to € 480 per month and still qualify for the PUP is also welcome.

Potential home buyers, such as Tom, will have welcomed the extension of the Help to Buy scheme until the end of 2021. However, given that housing output over the coming months may be lower than had been expected, due to the impact of Covid-19, extending it, as those in some quarters suggested, to second hand homes, could have helped keep price inflation on new homes at bay.

The decision to row back on pushing the state pension age up to 67 will also be welcomed by families approaching retirement, who would have otherwise had to fund the year from 66-67 in retirement entirely from their own funds.

What wasn’t included

But for many families, the budget may have been more about what was not included, than what was.

Cash strapped families for example, will bemoan the fact that no additional investment into either early years education or after-school care was announced. Those on the Temporary Wage Subsidy Scheme are still unclear as to how much their tax burden may yet be - even if the Minister has indicated it it won’t be “significant”.

And those who have seen their income increase over the past year will find that their tax burden will actually increase next year, due to the lack of any indexation in tax bands.

In addition, it had been expected that there would be some relief on the home utilities front, in the form of a tax credit or such initiative, for those who have been working from home and are starting to incur real expenses to do so.

Low income worker: Rebecca

Rebecca is a 32 year old waitress in a pub from Kildare. She works full-time and moved out of her family home in 2019 to rent a one-bedroom apartment. Her annual earnings are € 22,000 per annum.

Since Covid19 restrictions were imposed Rebecca moved back home with her parents. She has been out of work and is receiving the Pandemic Unemployment Payment (PUP).

She is worried that she will have tax to pay on her PUP payments however she is happy that a Christmas bonus will be paid. Rebecca is considering training to be a special needs assistant and is happy that there will be funding for more special needs assistants.

Single parent public sector worker: Tom

Tom is 29 years old and a single parent. He lives and works in North Co. Dublin, as a nurse. Tom earns €36,000 per annum. As a frontline worker, he is happy with the level of investment for the health service.

He is paying € 800 for a two-bed apartment. However, he would like to get on the property ladder and hoping to use the Help to Buy scheme to help them get his deposit together. He is relieved to see that the Help to Buy scheme has been extended and believes this will help him greatly in the purchase of his first home.

Tom’s ‘net’ monthly income has increased by € 20 due to the change in USC to account for minimum wage increases.

Dual income family: Mark & Linda

Mark is married, in his 50s, and lives in Louth with his wife Linda. Mark is a self-employed hotelier. Linda has a part-time job as a beautician and earns a salary of € 23,000.

They have four children, one of whom still lives at home. Mark’s annual income over the last number of years was € 152,000.

Mark and Linda have been significantly impacted by the Covid-19 pandemic. There hotel closed during lockdown and while it has since reopened, they have incurred significant costs in ensuring social distancing and a decrease in bookings.

Linda was also temporarily laid off during lockdown and received the Pandemic Unemployment Payment (PUP). They are worried about whether more restrictions will be imposed in Co. Louth and how it will impact their business. Mark and Linda are also worried about what Brexit might mean for the hotel they own in Co. Louth.

They are happy that the 13.5 per cent VAT rate will reduce to 9 per cent and that a compensation scheme will be implemented for businesses that have had to close due to Government restrictions.

They are also happy that the debt warehousing provisions will now apply to the payment of 2019 tax and 2020 preliminary tax for the self-employed.

The increase in the earned income tax credit is very welcomed by Mark. Mark and Linda’s ‘net’ monthly income for 2021 will be € 8,292, after deduction of taxes, PRSI and levies. With this and the adjustment to USC bands, their net monthly income has increased by € 190.

Pensioners: Leslie and Kitt

Leslie and Kitty are married and living in Cork. They own their family home having paid off their mortgage. Leslie and Kitty are in their late 70s.

Leslie receives an occupational pension of €22,000 along with the State contributory pension and deposit interest. Kitty also receives the State contributory pension.

Leslie and Kitty’s combined ‘net’ monthly income in 2021 is € 3,765. If they had the same level of income and their circumstances were the same in 2010 their net income would have been € 3,856, representing a decrease of € 90.

Leslie’s occupational pension is subject to USC however they are happy that the USC rates have not changed over the over 70s and the social welfare Christmas bonus will be paid.

Single-income family: Ellen & Joan

Ellen & Joan are in their late thirties. They live in Kilkenny in a four-bed semi-detached house. They have 2 children aged 12 and 6. Ellen is a pilot. She gave up her job over 10 years ago when their son was born and has now returned to work. Joan who used to work full-time in a tech company now stays at home with their children. Their annual income is € 75,000.

Due to the Covid-19 pandemic Ellen’s income has been reduced by 58 per cent.

They also receive rent from renting out a room in their home and have boosted their income by €14,000 a year thanks to the rent-a-room scheme. This is within the current tax-free limits so they receive this amount, tax free, on top of Ellen’s salary.

They are relieved that no changes have been made to the rent-a-room scheme as this would have an impact on their tax-free income however they are disappointed that there has been no further increase announced to the home carer credit.

High earning couple: Frank & Alison

Frank and Alison are in their early forties with two children. They live in a € 1.5 million four-bed detached house they own in Dun Laoghaire. Both Frank and Alison are accountants and earn a combined annual salary of €250,000.

Given the value of their home, they are not happy to see changes to local property tax imposed by their local county council.

They were considering buying a new house and were worried about proposed changes to stamp duty for residential properties therefore they are happy to see no change in the budget. They are also considering buying an electric car, so they are happy to see lower VRT rates and motor tax rates for electric cars and cars with lower emissions.