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Ireland Slashes Taxes Again In New Budget

by Jason Gorringe, Tax-News.com, London

14 October 2015


Irish Finance Minister Michael Noonan's 2016 Budget will reduce the marginal tax rate for middle-income earners to 49.5 percent and address disparities in the treatment of the self-employed and employees.

Noonan's Budget, delivered on October 13, includes EUR750m (USD855m) in "revenue relieving" measures.

From January 1, 2016, income up to EUR13,000 will be exempt from the Universal Social Charge. This will remove approximately 42,500 workers from the scope of the charge entirely. Noonan will also reduce the three lowest rates of USC. The 1.5 percent rate, applicable to the first EUR12,012 of income, will fall to 1 percent; the 3.5 percent rate, applicable to income in excess of EUR12,012 up to an increased threshold of EUR18,668, will fall to 3 percent; and the seven percent rate, on income between EUR18,669 and EUR70,044, will fall to 5.5 percent. These changes will cost EUR772m in a full year.

Noonan said: "This will reduce the marginal rate of tax to 49.5 percent for all earners under EUR70,044; the first time since the supplementary Budget in April 2009 that the marginal rate has dropped below 50 percent for middle income earners."

In addition, the Home Carer Tax Credit will be increased by EUR190, to EUR1,000 per year, to assist single-income married couples with children or those who care for an elderly or incapacitated relative. The earnings threshold has also been raised to EUR2,120.

Noonan said that, taken together, these changes will "enhance the progressivity of our income tax system, with the top one percent of income earners estimated to pay 22 percent of all income tax and USC collected. In contrast, the bottom 75 percent of income earners will pay 19 percent of the total."

Noonan is also taking steps to address the treatment of self-employed persons. He will introduce an Earned Income Tax Credit worth EUR550, which will be available to those with earned income who do not have access to the existing Pay As You Earn (PAYE) credit. "This will be a significant benefit to small business owners right across the country, including small retailers, publicans, farmers, and tradesmen. I see this as a first step, and further steps will be taken in future budgets, as resources permit," Noonan explained.

To provide further assistance to entrepreneurs, Noonan will introduce a revised capital gains tax (CGT) regime from January 1, 2016. A reduced CGT of 20 percent will apply to the disposal, in whole or in part, of a business up to an overall limit of EUR1m in chargeable gains. The three-year tax relief for certain start-up companies will be extended for three years, to the end of 2018.

Noonan will propose that the Government should postpone the revaluation date for the Local Property Tax (LPT), from 2016 to 2019. He said this will mean that home owners are not faced with significant increases in their LPT liability in 2017 as a result of increased property values, and should afford sufficient time for the Government to consider the recommendations made in Dr. Don Thornhill's review of the tax, published alongside the Budget.

Likewise, to take into account the recovery in asset prices, the capital acquisitions tax Group A tax-free threshold, which broadly applies to transfers between parents and their children, will be increased from EUR225,000 to EUR280,000.

The Budget also contains the following tax-related measures:

  • Intellectual property income that qualifies for the new knowledge development box (KDB) will be subject to a reduced, 6.25 percent rate of corporation tax;
  • Provision will be made in the Finance Bill for the introduction of country-by-country reporting, in line with OECD recommendations;
  • The amount of finance that can be raised by a company under the Employment and Investment Incentive scheme will be doubled to EUR5m a year, subject to an increased lifetime maximum of EUR15m;
  • The Government will introduce a new employee's Pay Related Social Insurance (PRSI) relief of a maximum of EUR12 per week;
  • The weekly threshold at which liability to employer's PRSI increases from 8.5 percent to 10.75 percent will rise from EUR356.01 to EUR376.01;
  • The 0.15 percent pension fund levy will end this year;
  • The bank levy will be extended to 2021, subject to a review of the methodology used to calculate it;
  • The nine percent value-added tax (VAT) rate for tourism will be retained;
  • The cap on eligible expenditure for the film tax credit will be increased to EUR70m;
  • The Home Renovation Incentive tax relief will be extended until December 31, 2016;
  • An income tax credit worth up to EUR5,000 a year will be made available to two people entering into a partnership with an appropriate profit-sharing agreement that makes provision for the transfer of a farm to the younger of the two farmers at the end of a specific period, not exceeding ten years;
  • The road tax system will be simplified; and
  • The excise duty on a pack of 20 cigarettes was increased by EUR0.50 at midnight on October 13;

Concluding his Budget speech, Noonan said that as resources become available, the Government "will progressively abolish the USC to reward work and reduce the marginal rate to no more than 50 percent for all workers to make Ireland more attractive for mobile foreign investment and skills, including our returning emigrants." It will also "complete tax equalization for the self-employed."

Reacting to Noonan's announcements, Danny McCoy, Chief Executive Officer of business association Ibec, said: "The budget is right for the economy at this time and signals a new phase of economic development. The crisis is behind us and we are planning ahead. The Government has taken on board the concerns of business, reduced the marginal tax rate, and encouraged private investment."

He said that in spite of Noonan's cuts, the marginal tax rate remains high. Ireland is, nevertheless, "moving in the right direction," he said.

"No worker, no matter what they earn, should pay over half their marginal income in tax. A reduced rate will make it more attractive to take a job, accept a promotion, and do overtime. It will help attract Irish emigrants back and make it easier for companies to attract and retain mobile talent. The USC reduction will increase January pay packets by about two percent and will support the positive economic momentum. There is however some way to go. Despite tax cuts, take-home pay will still be significantly below pre-crisis levels for many earners," McCoy said.

McCoy did however welcome the reduction in CGT for entrepreneurs and the introduction of a new tax credit for the self-employed. He said it will become more attractive to invest in new businesses and expand existing operations, and the measures will encourage more people to start their own businesses. In addition, the announcement of the KDB rate "sends out a clear signal that Ireland will continue to compete aggressively for mobile investment … [and] support Ireland's position as a transparent, stable, and investment-friendly business location," he concluded.

TAGS: capital gains tax (CGT) | compliance | Budgets | tax | investment | small business | business | tax compliance | Ireland | tax incentives | entrepreneurs | employees | budget | corporation tax | tax thresholds | tax credits | excise duty | ministry of finance | tax rates | social security | tax reform | retail | trade association | trade | individual income tax

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