MOST PAYE taxpayers will be better off when the Budget measures come into effect from April 6th but single middle-income earners and married workers on very low incomes will fare best.
Married workers on low incomes will benefit from the increase in exemption limits which will allow them to qualify for marginal tax relief. Middle-income earners will benefit most from the widening of the standard income tax rate band.
For PAYE taxpayers, the change which will have the greatest impact in the 1996/97 tax year is the significant widening in the standard (27 per cent) rate income tax band. The Minister for Finance is increasing the standard rate income tax band by £1,000 to £18,800 for married couples and by £500 to £9,400 for single taxpayers. This means that, for married couples, £1,000 of income will now be taxed at 27 per cent instead of at 48 per cent - a saving of £210.
This change only benefits people paying tax at the 48 per cent rate this year; someone already paying tax at the 27 per cent rate cannot benefit unless the increase prevents them entering the 48 per cent tax band.
The widening of the standard rate tax band will make the single biggest positive impact on the take-home pay of top rate taxpayers next year a strongly positive impact.
Increases in tax allowances benefit all taxpayers by taking more income out of the tax net, but higher rate taxpayers benefit most. Every £100 increase in the personal allowance adds £27 to the take-home pay of a PAYE worker paying tax at the 27 per cent tax rate. But the same £100 increase adds £48 to the take-home pay of a top-rate taxpayer.
As a result of the increase in the standard rate tax band some 33,000 will no longer pay tax at the 48 per cent rate. The combination of allowance increases and the widening of the standard rate band means that a single person can earn up to £11,850 before having to pay tax at the 48 per cent rate. In the current year he/she reaches the 48 per cent rate when earning over £11,240.
Mr Quinn announced a £300 increase in the personal tax allowance to £5,300 for married couples and a £150 increase to £2,650 for single workers. Widowed, single parent and widowed parent allowances will increase by £150. But the increases in the personal allowances are complicated by the removal of the Pay Related Social Insurance allowance of £140.
Married couples with one spouse earning appear to benefit most - their allowances will increase by a net £160 (£300 less £140). The allowance increase will add £77 to the take home pay of a top rate taxpayer and £43 to the 27 per cent taxpayers income.
For a single PAYE taxpayer, the net increase in allowances is only £10, worth £4.80 to a 48 per cent taxpayer and £2.70 to a standard rate taxpayer.
The increase in the income exemption limits - the amount below which people are not liable for tax - - will remove 18,000 people from the tax net. The income exemption limit has been increase from £7,400 to £7,800 for a married couple under 65 years age.
In addition to removing lower-paid workers from the tax net, the increase in exemption limits will allow about 15,000 people to claim marginal tax relief. This means they will be able to pay significantly less tax because their earnings are only marginally above the new income exemption limits.
While a single person, when the allowances are calculated, would appear to come into the tax net when income exceeds £3,450, the increases in the income exemption limits mean that no tax will be due before income reaches £3,900. Even then the worker will be entitled to marginal relief - effectively ensuring that he/she will pay very little tax.
The take-home pay of most low-paid workers and people earning up to the new PRSI income ceiling of £22,300 will benefit from the increase in the weekly income exemption from £50 to £80. There will be no PRSI levy on the first £80 of weekly income in 1996/97. But the increase in the ceiling for PRSI contributions will catch higher-paid workers.
For mortgage holders and subscribers to Voluntary Health Insurance, the positive impact of increases in allowances, reductions in PRSI and the widening of the standard rate tax band will be diluted by changes in tax relief on mortgages and VHI subscriptions.
These reductions in tax reliefs mainly affect people who pay tax at the top 48 per cent rate. But some people who pay tax at the 27 per cent rate may he affected if they are in the 27 per cent because their tax allowance has been boosted by the inclusion of the full amount of their qualifying mortgage interest. (See Mortgage Interest Rate Relief, page 7)
In the 1994 Budget, the then Minister for Finance announced his intention to allow tax relief on mortgage interest only at the standard 27 per cent tax rate. The change is being introduced over a four year period which started in the 1994/95 tax year.
By the 1997/98 tax year, relief on qualifying mortgage interest will be allowed at the standard 27 per cent rate only.
Mortgage holders who pay tax at the 48 per cent rate should have noticed reductions in their mortgage interest this year and last year. By the end of the four-year period, the reduction in the effective rate of tax relief from 48 per cent to 27 cent will have driven up their tax bill significantly.
In simple terms, for 48 per cent tax payers, the cut in relief from 48 per cent to 27 per cent will cost them £21 for every £100 of qualifying mortgage at the end of the four-year period. But the impact is complicated. For example, a taxpayer whose qualifying mortgage interest was £l,080 will see his/her tax relief fall from £595 in 1993/94 to £292 in the 1997/98 tax year, a cost of £303.
Tax relief on VHI subscribers is being scaled hack to the 27 per cent tax rate over two years which started in the current year. By the 1996/ 97 tax year, tax relief on VHI contributions will only he allowed at the 27 per cent rate. The reduction in relief for 48 per cent taxpayers will he £21 per £100 of subscription, over the two years.
PAYE taxpayers with dependant children will be able to add £2 a child a month to their income from September when increases in the child benefit come into effect.