Background

On 8 March 2023, the Department of Finance launched a public consultation on Ireland’s Personal Tax System, noting that “the Government is committed to developing a review of the personal tax system, having regard to the medium term….The exercise will have regard to the fact that the personal tax system should be underpinned by a number of desirable principles – the system should provide a sustainable and stable source of revenue to the Exchequer, while at the same time supporting a competitive economy”.

The consultation raised a number of key questions on Ireland’s Personal Tax System focussing on the incentivisation of work, the progressivity of the tax system and matters of income redistribution:

• Question 1: Do you have any suggestions on how the personal tax system could be reformed or enhanced, while broadly maintaining the yield and ensuring it continues to provide a sustainable and stable source of revenue to the Exchequer to fund public services?

• Question 2: Does the personal tax system sufficiently support a competitive economy to incentivise and encourage work?

• Question 3: Do you have views on the progressivity of the personal tax system?

• Question 4: Do you think the personal tax system operates as an effective means of income redistribution?

• Question 5: What are the key areas in the personal tax system for future policy consideration?

Read our submission in full here.

Our views and core recommendations

A tax policy that is competitive and effective is vital to Ireland’s position in retaining and attracting talent in the world which is highly digitalised and mobile. This is critical both in the context of inward investment to Ireland and supporting indigenous business and entrepreneurs. In the absence of any reform, our current personal tax regime may act as a disincentive for businesses and workers who are considering doing business in Ireland as, for example, our top combined personal tax rates of 52% - 55% remain among the highest in the EU.

Therefore, we would recommend considering two main short-term options for the reform of the existing personal tax system:

1. An increase to the standard rate cut off point (e.g., from €40,000 to €50,000); and
   
2. A reduction in the higher rate of Income tax. 

The above recommendations should, in our view, be designed in such a way so as to ensure that the top combined tax rate for a worker based in Ireland (whether employed or self-employed) should not cross 50%. An additional solution for achieving this reduced personal tax burden would look to introduce an intermediate rate of tax, although the same outcomes could be achieved without the need for a third rate of income tax.

In addition to above proposals regarding tax rates and bands, we recommend the following key areas in the personal tax system for policy consideration in advance of Budget 2024 and beyond:

• Continuous focus on tax rates, bands, and credits (with a view to ensuring that the top combined rate of tax does not cross 50% across income tax/USC and PRSI).

• Merging income tax with USC to provide greater clarity to workers and employers.

• No increase in employer PRSI and looking at opportunities to reduce the overall cost of employment for employers, where possible.

• Amend rules to allow for deductions in respect of genuine employment and business-related expenses.

• Enhance the SARP relief to make it easier to access, to remove certain administrative conditions, making it available for new hires, extending the relief to 10 years and allowing relief for USC and PRSI purposes.

• Enhancements to FED by moving to a territorial system of taxation.

• Enhancement to certain travel and subsistence expenses relief for temporary inbound assignees.

• Expansion of KEEP to all companies, and enhancement of the relief in terms of the treatment of shares with CGT treatment applying on disposal.

• Enhance the APSS rules by increasing the threshold from €12,700 to €25,000 and allowing relief for USC and PRSI purposes.

• Removal of the first two awards restriction on the Small Benefit Exemption.

• Enhancement of the R&D tax credit regime to provide greater personal tax benefit to employees involved in appropriate R&D activities.

• Maintain tax relief for medical expenses and review qualifying expenses.

• Reduce overreliance on personal taxes by considering a gradual broadening of the tax base in the medium to longer term, with a focus on less distortionary taxes.

• Consider fixed period tax exemptions to assist certain sectors (i.e., construction workers and those in under supported industries such as agri-food and fishery).

Next steps

While responses to the public consultation are currently under review by the Department of Finance, the consultation document indicates that a draft report on key findings is to be submitted to the Minister for Finance by mid-2023. Further detailed views and recommendations will be submitted to the Department of Finance in our annual Pre Budget submission, to be issued in due course.