Personal tax

Oct 09, 2018

Some might see it as a case of “robbing Peter to pay Paul” with the hike in VAT for the tourism and hospitality sector covering the USC and income tax reductions. But for the many low and middle income families and individuals who will see a bit extra in the bank from January, the changes are a further move in the right direction coming just over ten years after Ireland officially declared itself to be in recession and after many years of “austerity” budgets and pain for Irish taxpayers.

There wasn’t much in the way of surprises with the key announcements heavily signalled in advance by both the Taoiseach and the Minister. Highlights include the changes to the universal social charge (USC), an increase to the standard rate threshold and rises in both the home carer and earned income credits with the changes below each taking effect from 1 January 2019, unless otherwise noted. The personal tax changes announced are expected to cost €291 million overall.

USC changes follow last year’s downward trend

The USC changes are expected to cost €123 million in a full year. A reduction in the 4.75 percent middle rate coupled with an increase in the 2 percent rate band threshold were announced; details as follows:

  • €12,012 – €19,874 @ 2 percent (income threshold increased from €19,372)
  • €19,874 – €70,044 @ 4.5 percent (reduced from 4.75 percent and is the second consecutive 0.25 percent drop)

The entry rate remains at 0.5 percent for income up to €12,012 and the balance of income from €70,045 remains subject to the USC at 8 percent. There was no change announced to the income exemption of €13,000 per year.  For self-employed income over €100,000 there was no adjustment to the 3 percent surcharge. 

Standard rate band increases again

The standard rate band will increase by €750 to €35,300. In Budget 2018, the standard rate band increased by the same amount. Over the course of the last two Budgets, the entry point to the 40 percent rate of income tax will have increased by €1,500 for all single earners and to €44,300 for married couples with one income earner. 

The 2019 change will mean a further €150 tax reduction per year for individuals paying tax at the top rate – a saving of €300 in total over 2018 and 2019.

According to the Budget 2019 Tax Policy Changes document, the combined total saving for a single employed person will be €142 (about €3 per week) if you earn €35,000 and €289 (just under €6 a week) if you’re on a salary of €75,000.  Nothing more than a few extra cappuccinos a year in reality.

Income tax credits increased for some

The earned income credit for the self-employed will increase by €200 to €1,350. However this credit still falls €300 short of the PAYE credit of €1,650 for employees. An additional €300 will be added to the Home Carer Credit to bring it up to €1,500. Overall these increases will cost a total of €72 million in a full year.

Employer’s PRSI 

From 1 January 2019 the lower rate of employers PRSI will apply to income of €386 or less per week. This follows a recommendation of the Low Pay Commission to ensure that the increase in the hourly minimum wage does not lead to work disincentives for workers, in particular those seeking to work full-time. This will cost €3 million.

Also, from 1 January 2019, Employers PRSI will increase from 10.85 percent to 10.95 percent and is set to increase again in 2020 to 11.05 percent.

Key Employee Engagement Programme (KEEP) improvements

The KEEP share scheme came into effect on the first of January 2018 with the aim of helping SMEs to attract and retain employees in our highly competitive labour market.

Under KEEP, gains arising to employees on the exercise of KEEP share options are liable to capital gains tax on disposal of the shares, in place of an income tax, USC and PRSI liability on exercise. This incentive is available for qualifying share options granted between 1 January 2018 and 31 December 2023.

Unfortunately take-up of the scheme has been less than expected. As a result, the Minister announced three changes targeted at increasing the scheme’s uptake:-

  • the ceiling on the maximum annual market value of share options that may be granted is being increased to 100 percent of salary (up from 50 percent);
  • the three year limit under the scheme is being replaced with a lifetime limit; and
  • the overall value of options that may be awarded per employee is to increase from €250,000 to €300,000.

Enterprise Incentive and Investment Scheme (EIIS) – Finance Bill to see improvements?

Whilst no firm announcements were made on Budget day in respect of the EIIS, the Minister does intend to include a “priority” package of measures in the Finance Bill to address the main problems identified in a recent consultation on this incentive which will hopefully  increase its efficiency and effectiveness.

Merger of PRSI and USC – no news is good news

Last year, the Minister signalled his intention to merge the USC and PRSI into a single social insurance payment. In February of this year, an inter-Departmental working group was established to examine and report on options for the amalgamation of USC and PRSI.  

There was no mention of this project in the Minister’s speech or accompanying Budget documents.

PAYE modernisation project – full steam ahead

According to the Budget documents, Revenue’s real time PAYE system “will be fully operational from 1 January 2019”. Once implemented, this system is expected to yield additional Exchequer savings arising from increased compliance levels of taxpayers of €50 million. But what will the benefits be for taxpayers and their agents? Check out our PAYE modernisation hub for the latest on this imminent change.