Straitened economic circumstances mean Mr McCreevy is unlikely to be able to complete his controversial individualisation plan in the forthcoming Budget. But the Finance Minister is not for turning and any increases in the income bands taxed at the standard rate are likely to be accompanied by the continuation of the limit on the transferability of the standard rate band between married couples.
There have already been clear signals that taxpayers should not count on reductions in tax rates in Budget 2002. The Government has reached its target of a 20 per cent standard tax rate, and cutting the top 42 per cent rate to the target 40 per cent level would simply cost too much in the current environment. A one percentage point reduction in the top rate would cost about £80 million (€102 million).
Mr McCreevy's priority is to take more lower-income earners out of the tax net. He is expected to increase either or both the personal and PAYE credits and to index the income bands taxed at the standard rate. Currently a single person can have an income of £144 per week and a married couple, where both are earners, can have a weekly income of £288 before they fall into the tax net. The Budget is expected to increase these earnings thresholds to around £183 and £366 per week through a combination of the above measures.
For most taxpayers the Budget changes will be more difficult to assess than usual. There are two complicating factors - the change to a calendar tax year and the euro. The move from a system of allowances to tax credits and the change to tax relief at source for mortgage interest relief and VHI/BUPA is adding to the confusion.
The current year is a short transitional tax year as the system is changed to a calendar basis. To adjust current year income bands and credits for a full calendar year, divide by 74 and multiply by 100, or take a short cut and multiply by 1.35. The Budget will be introduced in euros rather than pounds, in keeping with the changeover to the euro from the start of the 2002 tax year.
All the figures, including income bands and credits, will be stated in euros - at first glance more attractive than the equivalent Irish pound figure, which should also be given. A taxpayer can convert their particular euro figures to pounds by multiplying the euro figure by .787564. Current 2001 pound figures can be converted into euros by dividing by .787564.
To assess the impact of Budget measures, taxpayers need to adjust their current year figures for a full 12-month year and then convert those figures into euros.
The Irish Times in association with PricewaterhouseCoopers will provide a table adjusted for these changes in Budget 2002 on December 6th to help taxpayers calculate their positions.
Tax credits replaced tax-free allowances from April 1st, 2001. Taxpayers are entitled to credits depending on their personal circumstances - for example marital and employment status.
Allowances were deducted from gross income to get taxable income, which was then taxed according to the standard and top rate bands. The system benefited higher earners most because allowances were effectively granted at the top tax rate. Under the tax credit system, gross income is taxed in line with bands and rates, and then tax credits at the standard tax rate are added back to reduce taxable income.
Individualisation, which was first announced in budget 2000, was to be introduced over a three-year period. The plan envisaged individualised standard rate income bands for each partner in a married couple - more of the couple's combined income would be taxed at the standard rate.
However, the announcement in 2000 that the income band taxed at the standard rate would be £34,000 for a married couple where both were in employment but would remain at £28,000 where a couple had only one income led to a political storm. A special tax allowance of £3,000 had to be introduced for families where one spouse worked in the home, caring for children, aged or incapacitated persons.
Before budget 2000, the standard rate income band was £28,000 for all married couples. The current position, adjusting for a 12-month tax year, is that a married couple with one income has a standard rate income band of £29,000, while the maximum band for a married couple with two incomes is £40,000. This means that up to £11,000 more of a dual-income couple's total income can currently be taxed at the standard rate rather than the top rate, a tax saving of £2,420 for a couple earning £20,000 each, compared with a single income couple earning £40,000.
The position is complicated by limits on the transferability for tax purposes of the standard rate income band between couples and by the Home Carer Allowance. Individualisation only affects married couples whose joint income exceeds £29,000. To benefit, each member of the couple needs to have an income and the earnings split between the couple will determine the extent of the benefit.
For example where there is only one earner with a £40,000 income, some £29,000 of the couple's income is taxed at the standard rate and the balance at the top 42 per cent rate, giving a tax bill of £7,820, allowing for the PAYE credit. The tax bill of a similar couple who also have a Home Carer Allowance would be £7,220. But individualisation reduces the tax bill to £5,000 for a couple with joint income of £40,000 where each earns £20,000. Where the joint income of £40,000 is split between one income of £32,000 and one of £8,000, the tax bill is £5,660 - some £3,000 more of their income is taxed at the top rate because of how their earnings are split.
Individualisation is highly controversial. In 2000, Mr McCreevy was accused of favouring higher earners and discriminating against single-income families to get women back into the workforce. With diminished resources and facing into a general election year, Mr McCreevy is unlikely to stir up that controversy in Budget 2002.
Tomorrow: funding health service reform
