We are now in the final straight for Budget 2018, shortly Minister for Finance Paschal Donohoe will walk into Leinster House with a briefcase to deliver for the first time his pronouncements on how much of our pay cheque we get to keep.
While it’s still uncertain as to exactly what we might see, one thing is clear; it’s not going to be the most generous of budgets. As it is, some €170 million of the so-called fiscal space has already been earmarked to finance measures carried forward from last year. That doesn’t leave much of the €300 million or so space mooted for this budget.
So, while the options might be plenty, the question is what can the State afford? Or can some “hidden fiscal space” turn up trumps and deliver tax cuts for us all?
Income tax cuts
Thanks to the "hidden fiscal space", Taoiseach Leo Varadkar believes there is scope for income tax cuts on budget day, and is eyeing up cuts to the deeply unpopular universal social charge (USC) as well as some tax relief for middle income earners, saying early in September that he wants to have "fewer people hitting that higher rate of income tax". But don't get your hopes up too high. The tax burden on individuals may have risen sharply during the years of austerity but is unlikely to drop at a similar pace.
As PwC tax partner Pat Mahon notes, the USC brought in €3.7 billion last year.
“It’s an awful lot for the exchequer to wipe out in one go. I just can’t see that happening,” he says.
Given the constrained finances, Mahon expects that many proposals, such as the much-discussed merging of PRSI with the USC, may be announced this year but introduced on a phased basis in the years to come.
The merger of the two taxes could be tricky, Mahon says. “It could be a very difficult one to manage as you’re bound to have winners and losers in that, and it’s easy to see winners who weren’t envisaged and which could cause political chaos,” he says, noting that people over the age of 65, for example, don’t pay PRSI, but they do pay USC.
Amendments to the USI/PRSI regime are also expected to involve the extension of existing dental, optical and paternity leave benefits.
With about one in three income earners now paying no income tax in Ireland, the Government may look to offer some relief to those “getting up early in the morning”, or the so-called squeezed middle, who contribute a lot. Recent Revenue figures show that 26 per cent of taxpayers pay 83 per cent of tax.
As KPMG partner Olivia Lynch notes, Ireland has the most progressive tax regimes in the European Union, and she would like to see some easing of the burden, noting that a reduction in high marginal tax rates “will actually increase government revenues”.
One way to do this would be to increase the PAYE tax credit (currently €1,650) along the lines of the UK, which abolished it for those earning more than £123,000.
“That might pay for itself,” Mahon says.
With the headline “top tax rate” of 52 per cent also impacting on foreign direct investment, cutting this would also ease the burden. Mahon notes that cutting the standard rate from 20 to 19 per cent would bring down the top rate to 51 per cent, and would be relevant to a lot of people. Doing so, however, would cost about €600 million.
Dropping the top rate from 40 per cent to 39 per cent would cost about €339 million, while increasing the bands at which you pay enter the top rate by €1,000 would cost €200 million. Dropping the top rate °would benefitsome 550,400 taxpayers.
“That [increasing the bands] hasn’t been increased for the last two budgets, so it is somewhat overdue to be looked at,” Mahon says.
Indeed Mr Donohoe hinted at just such an approach in a speech to the Kennedy Summer School in early September. Currently a single taxpayer becomes liable for the higher rate after earning € 33,800, a low level by international standards. The rate for married couples where just one is earning is € 42,800. Increasing the standard rate band would benefit those earning above these income levels by ensuring that more of their pay would be taxed at the lower 20 per cent rate.
However, a €1,000 increase in the band would see the average earner save less than € 200 a year.
Fianna Fáil has meanwhile suggested that a better approach to alleviate middle income earners would be to cut the 5 per cent rate of USC to 4.4 per cent. This would save someone earning € 40,000 a year about € 106, or about € 250 for someone earning € 75,000. It would apply to a greater number of tax payers, at about 1.3 million.
Welfare payments to rise
The Taoiseach has previously indicated his preference for an increase in the State pension, and this has gained momentum in recent weeks, with a figure of €5 a week put forward. This would see the rate of a contributory pension rise to €240 a week.
Inheritance tax threshold to increase
The Government has previously committed to increasing the threshold on inheritance tax from a parent to a child to €500,000. Last year, it raised it to €310,000 and, given that the yield from the tax has increased, despite the rise in the ceiling, it’s expected that it might shorten the distance again this year, with a further increase on the cards.
However, Lynch doesn’t see it jumping to €500,000 just yet.
“Every 10 per cent increase in the threshold will cost the guts of €22 million,” she says, adding: “I would like to see something between €350-€400k.”
While a change to the other categories is unlikely, given that they are such good revenue earners, Lynch notes it might be time to make some move on these.
“The family dynamic is changing so much,” she says.
Other changes to the regime could also be on the way. In the summer's Tax Strategy Group papers it was suggested that the small-gift exemption, which allows someone to receive a gift of €3,000 a year free of tax, may be increased to €3,500 or € 3,750 – or even reduced to € 2,750 or €2,500.
Landlords to get some relief
Last year, the Government made some moves to relieve the tax burden on landlords, increasing the amount of interest allowable as a deductible expense from 75 per cent to 80 per cent, with a view to bringing it back to 100 per cent over five years. Now it’s set to go one step further and increase the threshold to 85 per cent; but could it hike it up even more?
“It’s an obvious measure to accelerate and one that could easily be done, especially at a time when interest rates are quite low, so the impact will be quite low,” says Lynch.
Many boom-time landlords are on tracker mortgages, so the amount of allowable interest will be quite low and any change for 2018 will not come into play until landlords file their 2018 tax returns in 2019, so there is a bit of breathing space for the Government.
Another area the Government could look at, Lynch says, is making it more tax-effective for landlords to run their properties through companies, by applying the 12.5 per cent rate of tax on trading activities, while allowing local property tax (LPT) as a deductible expense would also be welcome.
“It has been mooted over a few budgets as the LPT is a significant charge faced by landlords, and the view is that it gets passed on in terms of rent,” says Lynch.
The ongoing housing crisis is also likely to feature, but it’s “tricky” to see what the Government might do to boost supply, Mahon says.
Capital gains tax unlikely to fall
It ruffled several feathers during the summer when the Tax Strategy Group proposed scrapping capital gains tax relief on the family home, although this is unlikely to ever see the light of day.
Nonetheless, CGT, which is currently levied at a rate of 33 per cent, is unlikely to fall, while a change in the exempt amount, of €1,275 is also seen as unlikely.
One aspect which could be ripe for adjustment is age-related relief, which allows a business owner transfer all or part of their business potentially free of CGT. However, the relief is restricted once the business owner passes the age of 66, and this means some business-owners may be encouraged to transfer even if the business isn’t ready for it.
“I would like to see some change in that,” Lynch says.
Excise
It’s quite possible that the Government could look to increase excise on cigarettes once more.
“If they want to decrease taxes somewhere else, it would certainly be a revenue raiser,” Mahon notes. The price of a pack of 20 cigarettes has increased over the last 15 years from €5.87 to €11.30 in 2017, and Ireland now has the highest rates of duty on tobacco products.
However, there is still seen to be scope for increases, and the Tax Strategy Group suggested an increase of up to €1 on tobacco. However, Brexit-related sterling weakness and the threat of imports from Northern Ireland might undermine the case for an increase this time around.
In line with international trends, making diesel less attractive by increasing tax on it is now seen as a distinct possibility, although Mahon notes that it could be done on a phased basis.
The current rate of excise on petrol is 58.7 cent per litre, including a 4.6 cent carbon charge. The corresponding rates for diesel are 47.9 cent, with a 5.3 cent carbon charge. Any increases would make running a diesel car more expensive.
An incentive to encourage people to opt for an electric car could also be on the cards.
There is also talk that the Government may make a move on sugar tax, which could also be a revenue-raiser.
Tax to fall on savings
Taxes on savings have risen steadily over the past decade, up from 20 per cent in 2008 to 41 per cent until 2016, but are now on a downward trend. Last year the tax rate on savings (Dirt) was cut to 39 per cent, and further cuts are on the way, given the declining yield on the tax due to the bottoming out of interest rates. Dirt is now due to fall by two percentage points each year over the next three years to hit 33 per cent by 2020.
Whether or not Donohoe moves on exit tax, which applies to life and investment products, remains to be seen. It is still levied at the higher rate of 41 per cent, and the life industry would like to see the rates equalised. As the Tax Strategy Group noted, however, “it is possible that a higher rate of return could be achieved on investment products compared to deposit accounts even with higher rates of taxation”.
Property tax
Given how property prices have soared since the property tax was first introduced in 2013, the Government has a challenge on its hands in terms of how it deals with the tax. If it goes through with its planned revaluation in 2019, some homeowners could see an increase in their property tax of as much as 125 per cent, while others may experience only marginal increases.
Given how politically unpalatable this might be, the Government is likely to change tack on how it levies the tax – and it might give some guidance on its new approach on budget day.
Indeed two weeks before budget day Varadkar ruled out a sharp increase in property taxes, noting that he would “move might and main” to avoid any sudden hike in property taxes for people in 2019.
Field levelled for self-employed
The differential in how PAYE workers and the self-employed are taxed is likely to be narrowed further this year. Introduced in 2016, the earned income tax credit allows self-employed workers to claim a tax credit similar to that enjoyed by those earning in the PAYE system. It currently stands at €950, having been increased from the original €500, but is still less than the €1,650 mentioned when the scheme was introduced. The Government will likely push this credit up again this year.
For Lynch, it’s one of the “strongest ways to incentivise people to be at work”, noting that it’s an approach the UK has taken in its move from a low-wage, high-tax, high-welfare society to a high-wage, low-tax, low-welfare one.
Entrepreneurs seek boost
There may be a CGT incentive for entrepreneurs already in place, but tax experts say it should be increased further. Currently, a reduced rate of 20 per cent is available for gains of up to €1 million, over a lifetime, but this doesn’t go far enough, with experts noting that in the UK relief is available on up to £10 million.
The relief may also encourage entrepreneurs to sell out early.
“What’s happening is entrepreneurs are selling out after putting in hard effort,” says Lynch.
A share-option scheme for SMEs may also be on the cards. A consultation on the issue was held last year but has not yet progressed. For Lynch, there is a “clear business rationale” as to why you’d have a more favourable share scheme for SMEs, and so some form of tax-friendly treatment for employees getting shares should be considered.
“It’s very difficult for SMEs to compete with multinational companies in terms of a ready market for shares,” she says.
Some relief for home-owners
Mortgage relief may be extended for homeowners at a cost of €100 million. The relief was due to expire at the end of this year, but the confidence and supply deal between Fianna Fáil and Fine Gael, which underpins the minority government arrangement, has committed to extending this beyond 2017. The relief currently benefits those who purchased a home between 2004 and 2012.
