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Finance Minister Paschal Donohoe urged to widen tax bands to offset effect of inflation on much-needed pay hikes


Finance Minister Paschal Donohoe

Finance Minister Paschal Donohoe

Finance Minister Paschal Donohoe

The Government has been called on to reduce income and spending taxes because the Exchequer tax take is rising as prices rise. This is hitting consumers with “unexpected windfall taxes”.

The higher amounts of tax being paid by consumers as the cost-of-living crisis deepens is putting the squeeze on household spending.

Chief executive of tax advisory firm Taxback.com Joanna Murphy said inflation-hit workers will look to mitigate its impact by negotiating pay increases this year.

But a knock-on consequence of this could be that up to 50pc of the hard-won salary hikes will be in extra taxation, benefiting the Exchequer instead of the employee.

This additional taxation is an unexpected bonanza for the Government and will ensure that the pay increases do not fully compensate for the impact of inflation, she said.

She called on Finance Minister Paschal Donohoe to make sure the Exchequer “does not unfairly benefit from salary stealth tax revenue” as a result of inflation.

At a time when workers are under significant financial pressure, the Government should forgo this extra tax by adjusting the tax rates or bands, Ms Murphy said.

She said that as greater numbers ask for higher pay, the rigid income-tax bands will ensure that more people move to the higher rate of tax.

“So while they might succeed in getting a 5pc increase in salary to match inflation, if they move into or are already in the higher tax bracket, the taxman will get half of the increase they’ve sought from their employer.”

The Taxback.com boss said that for an employee on a typical income of €40,000, a 5pc increase would result in them getting a an extra €2,000.

But around €1,000 of that will go to the Government.

“We believe the tax bands should be widened to avoid this situation, and linked to the cost of living going forward.”

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She said that as the prices of goods increase, so too does the portion of Vat collected for each sale.

And the increase in the tax recovered though Vat is inflationary. If left unchecked it will lead to more inflation and wage demands.

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