Income tax - Individuals
Insight from Joanne Whelan, Partner, Deloitte on Budget 2015.
Budget 2015 sees the introduction of a number of measures as part of a 3-year plan to reduce the overall marginal rate of tax for low and middle income earners. This includes a cut in the top rate of income tax from 41% to 40%, a reduction in the level of Universal Social Charge (USC) payments for individuals earning income of less than €70,000 and an increase in the standard rate band for individuals to €33,800. Relief has also been introduced for the much-criticised water charges in the form of a tax credit for water charges paid up to a maximum of €500.
Broadly, the effect of the changes to income tax and USC will be to reduce the marginal rate of tax for those earning less than €70,000 to 51%. Individuals earning over €70,000 will see a 1% reduction in their rate of income tax with a corresponding 1% increase in the rate of USC. It is important to bear in mind that certain allowances which are deductible for income tax purposes are not deductible for USC purposes (e.g. pension contributions, nursing home expenses and some capital allowances) and this will have an impact. Thus, while we welcome the reduction in the top rate of tax and the widening of the USC bands at the lower rate, the impact of these changes is limited.
Ireland currently has the fourth-highest income tax rate in Europe, being behind Denmark, Sweden and Portugal. Given the revised strategy contained in the Road Map for Ireland’s Tax Competitiveness released today, it is important from an FDI perspective that we are seen to move the dial in terms of our overall marginal tax rate. We hope that in the next 2 years this may be considered a priority.
It is disappointing that the Minister failed to address the anomaly in the USC rate for employed and self-employed individuals. Under the new measures, employees pay a maximum rate of 8% on their employment income whereas self-employed individuals continue to pay a higher maximum rate of 11%. One of the principles of taxation is that it should be equitable. However self-employed individuals who bore the risks in a depressed economy to contribute to growth and job creation continue to bear the burden of higher tax rates. Employees earning a similar level of income to their self-employed counterparts will enjoy a 3% lower marginal rate of tax. This is anti-entrepreneurial in a time when our economy needs more people with entrepreneurial ability to help drive growth and create jobs and their contribution should be recognised.
The Agri-Taxation Review announced in last year’s budget is published today and Budget 2015 contains a number of measures to consolidate and increase the scale of farms in terms of size, productivity and also to encourage succession.
The changes to the income exemption which extend the income exempt limit to income of up to €40,000 where the lease is for a period of 15 years or more will assist older farmers in securing a tax-efficient income source to fund their retirement. In effect for individuals aged over 70 where this is their only source of income, their effective rate of tax including USC will be 3.5%.
In addition, capital gains tax retirement relief is extended to individuals disposing of farm land which has been leased for a period of up 25 years and lands let under conacre lettings up to 2016. Agricultural relief from capital acquisitions tax will now only be available where the individual is an active farmer or where the land is leased to an active farmer. The reduction in rate of stamp duty on the transfer of land to certain relatives by individuals aged 65 years or under should help to reduce the costs of transfer. The combined effect of these measures should help to create an environment to protect the income source of those transferring, create viable units and encourage the early succession of farms.