What the Budget will bring

With many rumours circulating about what will be in next week's Budget we outline the likely cuts and the areas that the Government would do well to leave alone, writes CAROLINE MADDEN

WITH ALL THE leaks, kite-flying, rumours and speculation in recent weeks, the lead-up to the Budget has turned into a political quagmire. But while the squabbling over broken election promises rumbles on, all we really want to know is: how badly will our pockets be hit when the Minister for Finance, Michael Noonan, takes to his feet in the Dáil next Tuesday?

At this point it seems inevitable that consumers and households, already suffering, will be in the firing line in the latest austerity Budget. Parents are facing a further cut in child benefit payments, while savers, and individuals with non-employment income, are expected to be hit with higher charges. However, it is hoped that families on lower incomes are in line for some form of reprieve in relation to the Universal Social Charge, while workers in general will escape the worst of the Budget cuts.

Overall, the main changes flagged for Budget 2012 are likely to cost an average two-child household at least €840* a year.

VAT

Thanks to our friends in the German Bundestag who, to use some football parlance, “let the cat out of the sack”, we now know that the standard rate of VAT – a tax on consumer spending – will be increased by 2 per cent to 23 per cent in the Budget. Though a zero rate of VAT will still apply to basic foodstuffs and children’s shoes and clothing, the rise in the standard rate is expected to cost the average household at least €500 annually. And according to research conducted by the ESRI, the VAT hike will disproportionately hit the poorest households in the country, unless it is offset by other measures.

The only upside is that the VAT increase is unlikely to be implemented in December. Tax experts agree it would be an administrative nightmare to change the system at such short notice, and the Minister confirmed last week that the higher rate will not come into effect until 2012, so the all-important Christmas shopping period won’t be affected. However, retailers and shoppers will feel the impact in the January sales.

HOUSEHOLD CHARGE

It seems almost certain that homeowners will have to begin paying an annual household charge (possibly a combined site and water charge) at a flat rate of €100 to their local authorities in 2012. Bernard Doherty, president of the Irish Taxation Institute and a tax partner with Grant Thornton, believes that this property tax model could work well. It is likely to operate on a similar basis to the €200 non-principal private residence (NPPR) charge – also known as the second home charge – which relies on self assessment. In its first year, the level of NPPR compliance was “extremely high”, he says. Both Doherty and Pat Mahon, a tax director at PricewaterhouseCoopers, expect there will be some kind of dispensation or exclusion from the new household charge for households on lower incomes.

CHILD BENEFIT

One of the most controversial Budget proposals is the €10 cut in monthly child benefit payments. The previous government set a precedent in terms of targeting this payment. In Budget 2010, this State support was cut from €166 a month to €150 for the first two children, and from €203 to €187 for a third child. Last year the rates were reduced again, from €150 to €140, and from €187 to €167 respectively. If the current Government pushes ahead and brings the monthly payment down by €10, this would set a two-child family back by €240 in 2012.

DIRT

Brian Cowen’s government tried to encourage spending by increasing the rate of Deposit Interest Retention Tax (Dirt) by 2 per cent in Budget 2011, bringing it to 27 per cent. The Minister is expected to push this higher again, perhaps up to 30 per cent, in order to make saving even less attractive.

“I think there is every chance that Dirt might be looked at,” says Bernard Doherty. “The machinery is there already to collect the tax. It really is a tax on saving.”

Unlike an increase in income tax, a Dirt rate rise wouldn’t erode people’s spending power, he says.

However, given the volatility in the euro zone, the mobility of deposits, and the importance of recapitalising Irish banks, the Government is unlikely to raise the Dirt rate to draconian levels for fear of driving Irish deposits to more favourable jurisdictions.

PRSI

Last year’s Budget held some nasty PRSI surprises – the employee ceiling of €75,036 was abolished and the Class S rate (which applies to self-employed individuals) was increased from 3 to 4 per cent.

Pat Mahon of PwC says he would be surprised if the PRSI rates were increased in this year’s Budget. If the employer rate of PRSI was increased from its current hefty rate of 10.75 per cent, “it would be disastrous in terms of employment” and would discourage companies from taking on more people, he says.

However, there has been a lot of speculation about changes to the treatment of “unearned” or “passive” income, ie income not earned from an employment or profession; perhaps from rent or dividends.

At the moment if you are self-employed, you must pay (Class S) PRSI on all income including this passive income. However if you’re a PAYE employee and youre paying Class A PRSI, then you do not have to pay PRSI on your unearned income. Rumours have been circulating that this exemption for PAYE workers is set for the chop in the upcoming Budget.

USC

The rumour mill is also whirring with speculation that the Government will try to counteract the hardship being inflicted on lower-income families by adjusting the Universal Social Charge.

The USC replaced the health and income levies last January, and brought very low-paid workers into the tax net for the first time.

Currently the lowest rate of 2 per cent applies to anyone earning more than €4,004 a year. A 4 per cent rate applies to income between €10,036 and €16,016, while the top rate of 7 per cent is levied on income over €16,016. There has been a lot of speculation that the lower USC bands or rates will be adjusted to ease the burden for low earners.

INCOME TAX

Workers will have been relieved to hear that the Government intends to leave the income tax rates unchanged. There was speculation earlier in the year that the personal income tax bands and credits would be lowered, but the Department of Finance confirmed to us that bands and credits will also be left untouched in Budget 2012.

PENSIONS

The previous Government ruffled a lot of feathers in the pensions industry last year when it not only announced the removal of PRSI relief on pension contributions, but announced that tax relief on pension contributions would be incrementally reduced from the top rate of 41 per cent to the standard rate of tax (currently 20 per cent), between 2012 and 2014.

The maximum rate of tax relief on pension contributions was due to be lowered to 34 per cent in 2012. However, there is a growing sense that the Government will not move ahead with this change.

ADDITIONAL PROPOSALS

The Government believes it can net an extra €100 million by tinkering with the system of capital gains tax (CGT), which applies to profits generated from the sale of assets, so changes in this area are expected to be announced.

However, it’s difficult to see how raising the CGT rate from its current level of 25 per cent to the rumoured 30 per cent could be a significant revenue-raiser, given that asset values have plummeted pretty much across the board, and the CGT contribution to the State coffers has fallen off a cliff in recent years. As one tax expert put it, 30 per cent of zero is still zero.

Other proposals that could be coming down the line in the Budget include a €50 medical card charge and an increase in the existing 50-cent-per-item prescription charge for medical card patients.

* The VAT increase will cost households €500 plus a year, the Household Charge will add another €100, plus the €10 cut in Child Benefit for two children will add another €240 over the year.