How might Noonan use €250m to give taxpayers a break
Published 30/08/2014 | 02:30
Michael Noonan expects to collect at least €17bn in income tax this year, and more next year.
But given all the speculation in recent days about tax cuts, let's assume a scenario where he decides to introduce some amount of income tax relief, say €250m or so in 2015.
That's a very modest amount compared with the overall €17bn figure to be collected, so there isn't going to be a bonanza for anyone. That's not to say we wouldn't gladly take any income tax relief we can get.
Single people on PAYE start paying income tax on income of above €16,500. Married PAYE people, depending on their circumstances, start paying income tax on incomes of around €24,750. The self-employed begin to pay tax at much lower income amounts.
What might €250m in income tax relief mean for taxpayers?
It all depends on how it's done. Despite crippling levels of unemployment and emigration in recent years, there are still well over two million income earners in this country.
If there is only €250m to spend on income tax relief, that means an average benefit of not much more than €125 per annum, or little over €10 a month.
There are several options available to the minister if he wants to divide out this amount of benefit by adjusting tax rates and personal allowances:
Reduce 20pc income tax rate to 19.5pc - approximate cost of €230m.
There isn't enough in the kitty for a full 1pc rate reduction but a 0.5pc rate reduction would fit.
This would benefit all income tax payers, but the maximum saving for anyone would be €164 per year.
As with all income tax cuts, the higher your income, the more you might benefit subject to this maximum.
Increase the 20pc income tax band by €1,500 - approximate cost €225m.
Once your income goes over €32,800, you start paying tax at 41pc instead of 20pc.
By that stage too, you're paying USC at 7pc and PRSI at 4pc bringing your total tax rate to 52pc.
If the 20pc income tax band were increased to €34,300, most people paying tax at 41pc would see savings of up to €315 per annum.
Reduce 41pc income tax rate to 40pc - approximate cost of €195m.
This would be of particular benefit to higher earners. Anyone earning more than €32,800 could expect to see an extra euro for every hundred euro they earn over the €32,800 threshold.
Add €150 to the personal tax credit - approximate cost of €275m.
At the moment, the personal tax credit stands at €1,650 and this would bring it up to €1,800.
The personal tax credit is a bit like handing out cash.
Adding €150 to the personal tax credit would result in a reduction in everyone's income tax liability by that amount.
However, unlike handing out cash, adding to the personal tax credit only helps you if you already have an income tax liability.
You can't claim a refund of the personal tax credit if you're not paying enough tax to use it up. Nevertheless increasing the personal tax credit could bring several thousand people out of the tax net altogether.
Add €200 to the employee tax credit - approximate cost of €260m.
The principle here is the same as increasing the personal tax credit with one very important difference - you'd only get the €200 per year benefit if you're an employee paying tax under the PAYE system.
The self-employed would see no benefit from an increase to the employee tax credit.
Reduce the 7pc rate of USC to 6.5pc - approximate cost of €225m.
The snag with the universal social charge is that it is actually universal - it applies to almost everyone and to almost every type of income. So just like the 20pc income tax rate, any change however modest is expensive in overall Exchequer terms.
Any change to the 7pc rate would benefit higher earners more than lower earners, partly because lower rates of 2pc and 4pc apply to income below €16,016, and partly because the 7pc charge is a flat rate with no allowances, credits or reliefs applying.
Given the severity of the tax hikes over the past six years, any reprieve will be very welcome.
However, as we've seen, different types of change benefit different categories of taxpayer.
No matter what changes Michael Noonan decides to make, it will be almost impossible to keep everyone happy.
Brian Keegan is director of taxation with Chartered Accountants Ireland