The introduction of the Universal Social Charge (USC) from this month will see pay packets battered severely.
The new USC is basically an amalgamation and re-arrangement of the health and income levies that were introduced, and then increased, in the last twoto- three years.
And the introduction of the USC comes at the same time when changes to tax credits and bands will see most people paying more income tax.
This is likely to lead many an earner to turn to their spouse when they get paid and scream: “Honey, they shrunk my pay packet.”
The new USC has already shocked those people who are paid weekly because they have now seen its devastating impact on their wages this month.
Those who are paid a monthly salary will be getting depleted pay packets in the next few days when the impact of the USC and the other Budget changes on income will become clear.
Ken O'Brien, tax director with accountancy firm PWC, commented: “The universal social charge is going to hit fairly hard.
“People who were exempt from the old income levy will now have to pay the USC. Lower earners will be hit and there is no exemption for those with a medical card.”
He indicated that the new USC was indiscriminate and across the board. “This is everybody getting hit and there is nowhere to hide.”
Anyone earning over €4,004 will now pay 2% USC, while those on incomes over a meagre €16,016 will be hit with a 7pc charge.
A 4pc charge will come into effect on incomes from €10,037 to €16,016.
Put another way, the rates and thresholds are as follows:
2% on the first €10,036;
4% on the next €5,980;
and 7% on the rest.
Cathal Maxwell of paylesstax. ie warned that the USC was set to catch a lot of people.
Laura McTiernan, tax consultant with the Irish Taxation Institute, said the introduction of the USC was one of the most significant announcements in Budget 2011 for taxpayers.
“It will most likely be one of the main changes that PAYE taxpayers will notice in their January pay packets.”
Lower paid will lose
The USC is likely to disproportionately impact those on lower salary levels.
Under the system we had up until last December, those earning less than €26,000 did not have to pay the health levy. That levy was between 4% and 5%.
For those with an income of less than €15,028 there was no income levy.
For those earning more than that the income levy was 2% on earnings up to €75,036. There was also a 4% rate (for those earning between €75,036 and €174,980) and a 6% rate for income over €175,980.
The changes mean someone earning €24,000 will feel the impact of the USC in a big way, Mr O'Brien explained.
Up to the end of last year this person did not have to pay the health levy. They would have paid the income levy at a rate of 2%, or some €480 a year.
“In effect a person on an income like €24,000 will now be paying the income levy and the health levy,” Mr O'Brien said.
This person's USC will be €1,000 — more than double what they will have paid in last year's income levy.
Some high earners will be better off
The new charge will see anybody earning over €16,016 paying a rate of 7% on their income. In the previous system, high earners would have paid a health levy of 4% on income up to €75,036 and 5% health levy on the remainder.
However, with the new USC a single worker earning €150,000, for example, will pay €1,432 less following the introduction of the universal social charge than they did paying the health and income levies.
This is because the 7% USC has replaced a combined 11pc health levy and income levy for the highest earners.
Some tax experts have calculated that this will mean a self-employed person earning €1m a year will be around €35,000 better off a year.
Asked about this, Mr O'Brien said: “The Labour Party, in particular, has made the point that if you are a high-earning selfemployed person your marginal rate of tax will have fallen under the Budget.
“These people will be several percentage points better off.”
Under the system that prevailed up to last month a selfemployed person on €175,000 would have paid income tax at 41%, the income levy at 6%, the health levy at 5% and 3% on PRSI (pay-related social welfare) on the higher parts of their income.
This would mean a total marginal tax rate of 55%.
From this month that person would see their marginal rate fall to 52% — a higher tax rate of 41pc, the USC at 7pc and PRSI at 4pc.
“To some extent everyone got hit. But the person on €24,000 is very unfortunate and has been creamed,” Mr O'Brien said.
Middle Ireland will be bashed
Also set to feel the impact are people on salaries of €80,000 to €90,000.
Although these might seem like high incomes, high costs in this country mean that people in these income brackets are not exactly swimming in cash, Mr O'Brien said.
Taxpayers in this income bracket will have been hit by the reduction in tax credits (the amount of income you can earn tax free), the lowering of the tax bands (which means paying more tax at the higher 41% rate) and the removal on the ceiling on paying PRSI.
“Let's call this person Mr ReasonablyOK. They have seen their levy costs go up because of the USC, while they are paying far more tax. Mr Reasonably OK has taken a real hammering.”
According to Department of Finance figures, a single PAYE worker paying into a pension and earning €75,000 a year will be €1,545 worse off a year. This works out at around €129 a month.
The USC alone will leave them €250 worse off a year.
If this person was earning €100,000, the hit to annual income will be almost €2,000, of which an additional €130 a year will go on the USC.
USC and pension contributions
Changes to how pension contributions are taken from your salary mean a reduction in takehome pay from this month onwards.
Up to this year, if a person was paying into a company pension scheme, defined benefit or defined contribution, or making Additional Voluntary Contributions (AVCs), their levies and PRSI contributions were only calculated after these pension payments had been made.
From now on you pay the USC on your pension contributions.
For instance, if you are earning €800 per week and then making pension contributions of €100, you will now be subject to PRSI and USC on the full €800 compared to just €700 last year.
The USC does not apply if your total income is less than €4,004.
Nor does it apply on payments made by the Department of Social Protection.
This means State pensions, child benefit and jobseekers' benefit payments are exempt.
Also exempt are payments made as part of the community employment schemes.
If you have already paid deposit interest retention tax (DIRT) there will be no further USC payment due to Revenue. Income from An Post savings certificates is exempt.
The over 70s do not have to pay the higher 7% rate of USC. The highest rate they pay is 4%.
Tax bands and credits
Take-home pay will be reduced due to a narrowing of tax bands and a reduction in tax credits — meaning that more people will be paying tax at 41pc.
The reduction in the standard tax rate band for a single person means that they will now pay tax at 41pc after they earn €32,800.
Up to now, the full 41% didn't hit until they earned €36,400. For married couples with both partners working, the tax hike will kick in after they earn €65,600 compared to €72,800 last year.
A wide number of tax credits, which allowed the claimant to further extend their tax-free income, were also slashed.
Anyone earning tax credits such as one-parent tax credit, home-carer tax credit or the incapacitated child tax credit will all see their tax-free entitlements fall.