Thursday 22 June 2017

Workers lose out on €450m: Why Budget 2017 gains for workers have been swallowed up

Mr Noonan’s decision not to index, or increase, the tax bands means that workers who get a pay rise or a promotion will pay a large chunk of it in tax. Photo: Douglas O'Connor
Mr Noonan’s decision not to index, or increase, the tax bands means that workers who get a pay rise or a promotion will pay a large chunk of it in tax. Photo: Douglas O'Connor
Charlie Weston

Charlie Weston

Gains for workers from Budget cuts to the USC will be swallowed up by the failure of Finance Minister Michael Noonan to widen the income tax bands.

The minister admitted in a Dáil reply that his department will take in an extra €450m from workers a year from deciding not to index the bands.

Overall this is more than the cost of the cuts to three of the USC rates announced in the Budget, which will cost the Exchequer €335m.

Tax bands refer to the income level where you start paying the top rate of income tax.

But Mr Noonan's decision not to index, or increase, the tax bands means that workers who get a pay rise or a promotion will pay a large chunk of it in tax.

The first part of your income, up to a certain amount, is taxed at 20pc.

This is known as the standard rate of tax, and the amount of income that it applies to is known as the standard rate tax band.

The remainder of your income is taxed at the higher rate of tax, which is 40pc.

Tax practitioner Cathal Maxwell worked out that a worker on €35,000 who gets a 2pc pay rise will see €280 of it swallowed up by tax.

If there was indexing of personal tax credits and tax rates, the person would pay only tax of €84 on their salary increase.

So by not indexing personal tax credits and rate bands the Exchequer gets an extra €196 in PAYE taxes.

The fact that workers hit the top 40pc income tax rate on relatively low levels of income is one of the main reasons workers in the "squeezed middle" pay more tax than in Sweden, Spain, Switzerland and the US.

Mr Maxwell, who runs the PayLessTax.ie online system for filing tax returns, said the failure to index the tax bands will give the Exchequer a massive boost.

"With increasing numbers in employment and salary increase demands throughout the private and public sectors, there is a very large tax benefit for the Exchequer by not indexing tax credits and tax rates," said Mr Maxwell.

Impact

In a question from Fianna Fáil finance spokesman Michael McGrath, Mr Noonan said the non-indexation of the bands will generate around "€385m in a first year and €450m on a full-year basis".

Mr McGrath said: "The biggest impact of non-indexation really is that entry point to the 40pc income tax rate becomes more and more punitive on workers."

He said that addressing the low entry point to a high tax rate is something that cannot be postponed indefinitely.

A spokesman for Mr McGrath said the PAYE and personal tax credits should have gone up by €45 if indexed in line with earnings growth.

Meanwhile the entry point to the top rate of tax should have gone up by €915.

"Basically we end up paying 40pc on that €915 instead of 20pc if the band had been indexed," he added.

Irish Independent

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