Why do some investors pay more tax than others?

Some investors may avoid a liability on gains depending on the regime

It's an issue that is often highlighted in the run-up to the budget, but one that continues to frustrate and perplex savers and investors alike; why is a higher rate of tax levied on the gains from life-wrapped funds and exchange-traded funds (ETFs) than on deposit accounts or shares? And is it time for a change?

Tax rates on investments

Depending on what instrument in which someone decides to save or invest, their ultimate gain will depend not just on the performance of the underlying asset, but also on the tax rate that applies.

Dirt (deposit interest retention tax) is levied on interest earned on bank and credit union savings at a rate that has varied significantly in recent years.

Back in 2008 for example, it was charged at a rate of just 20 per cent. However, it was increased thereafter, reaching a high of 41 per cent in 2016. Significant rate reductions followed more recently, as it fell to 37 per cent in 2018, and to 33 per cent for 2020 and 2021.


This means it is now on a par with capital gains tax (CGT), which is also levied at a rate of 33 per cent, and which applies to gains on shares.

Those investors in life wrapped funds, however, which are sold by life companies, as well as ETFs, often bought through online brokers, face a significantly higher rate of tax, known as exit tax, which is charged at a rate of 41 per cent.

It wasn’t always levied at such a high rate: back in 2008 the rate which applied was 23 per cent, and it hit a rate of 41 per cent the same time as Dirt. However, it hasn’t been reduced since.

Who pays the tax?

Depending on the regime, there may be some investors who can avoid a liability on their gains. Certain savers are exempt from Dirt, for example, including those who are over 65 and if there total income is below the income tax exemption limit, and those who are permanently incapacitated due to a mental or physical illness

With CGT, an annual exemption of €1,270 applies, while investors can carry forward any losses they incur to reduce tax owed on gains on subsequent investments. Investors paying the lower rate of tax on their income will pay a lower rate of tax on dividends earned from shares, as these are subject to income tax.

With exit tax however, the tax is paid by all, regardless of age, income or status. Not only that, but savers/investors in life wrapped products must also pay a 1 per cent life assurance levy, introduced in 2009.

And a recent amendment has brought further funds into the exit tax fold. Earlier this month, Revenue published a much awaited update on the tax treatment of ETFs. It stated that US ETFs, which had previously been understood to be subject to the CGT regime, will, from January 2022, be subject to exit tax.

Tax yield

So why the differential? As David Quinn, managing director of Investwise notes, the decision to drop the rate of Dirt back to 33 per cent was "an easy one" for the Government, because savers are earning so little interest these days, which in turn means the tax is delivering precious little tax for the Exchequer regardless of the rate.

Cutting the rate of exit tax on the other hand, would have a “much more material impact” on tax returns.

Indeed the yield for the exchequer from Dirt has slumped from a peak of €581 million back in 2012 to just €37 million in 2020. And it’s not just the State’s coffers which have suffered: interest earned by households fell from over €1.1 billion in 2013 to €90 million in 2019.

The yield on exit tax on the other hand, has grown from just €43.4 million back in 2012 to €124 million in 2020. While this is far off the 2015 peak of €247 million, that year’s inflated figure was due to deemed disposals on SSIAs invested following maturity of the scheme in 2007/08. Still, it remains a much bigger earner for the Exchequer than Dirt.


Given the differential that now exists between exit tax and CGT/Dirt – with those paying exit tax subject to a tax that is 24 per cent higher than CGT/Dirt – there have been continued calls in recent years for the regime to be harmonised.

Ahead of this year’s October budget, the Consultative Committee of Accountancy Bodies has called for such a change, arguing that the eight percentage point differential in the tax treatment of savings products is “unjustifiable and now is a good time to correct this anomaly given the need for consumer spending stimulus”.

Brokers Ireland, which represents financial advisers, has made a similar argument in its submission, calling for exit tax to be cut to 33 per cent, in line with Dirt and CGT "to ensure consistency and equality in the taxation of returns".

It says there is “no logical reason” why deposit interest should be taxed at a lower rate than returns from savings and investment policies, or why such policies should be taxed at a higher rate than those subject to the CGT regime.

It also wants the 1 per cent levy abolished, and has proposed a new incentive scheme for environmental, social and corporate governance (ESG) funds, whereby investors in such life-wrapped products would face an exit tax of 33 per cent.

“It would stimulate the greater adoption of ESG investment among the Irish public, while its fiscal cost should be modest,” the association says.

Quinn agrees that the rate of exit tax is “penally high”, particularly for investors in lower risk funds.

While investing directly in shares is an important tool for many, the view is that tax shouldn’t be the reason why risk averse investors, who may do better in a diversified fund, are investing this way.

Quinn can understand why exit tax may need to be higher than CGT, as dividends are allowed grow tax free under the gross roll-up regime in such funds, while dividends earned from shares are subject to income tax on an annual basis.

However, he argues that the differential shouldn’t be so high, and would like to see exit tax come down to 36 per cent.

Government approach

Despite the push back on the rate however, the Government has appeared reluctant to make any changes.

Back in 2017 for example, in the tax strategy papers published by the Department of Finance, it was stated that the reason exit tax wasn't cut at the same time as Dirt, was because of the cost. At the time, Revenue estimated a cut in the tax of two percentage points would cost about €11 million a year in lost taxes, while aligning the tax with Dirt would cost €22 million.

Subsequently, however, the Department of Finance published a report in 2018 saying that it wasn’t an issue of cost. Rather, it concluded that products subject to Dirt or exit tax are different in a number of respects, namely, “the level and application of fees to clients, the level of risk and return and potential losses, and hence the way in which they are taxed”.

But last year, cost again appeared to be an issue, with the tax strategy papers noting that due to the “current fiscal pressures”, the possibility of reducing exit tax “is significantly diminished”. It also added that this was particularly so, “given the lack of evidence to support any distortionary impact of the rate”, which goes against what the industry claim.

Brokers Ireland argues that the current system can have a distortionary impact on investors’ decisions, noting that investors who are prepared to take a risk “enjoy a lower tax rate and more benign tax regime if they invest directly in property, stocks and shares”.

“There is no logical reason for such discriminatory taxation treatment,” it says. Similarly Quinn says that the current regime is driving investors to find ways to get capital gains tax to apply to their investments.

“It’s a shame that the tax system dictates in some shape or form what instruments people use. It shouldn’t be that way,” he says.

For now, however, while always possible, it appears unlikely then that Paschal Donohoe will make any such moves to appease the industry to the benefit of savers/investors come next month's budget day.