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The squeezed middle & Budget 2022

Pat Mahon, tax partner with PwC


Budget 2022 gave something to everyone so cash benefits were spread thinly

Budget 2022 gave something to everyone so cash benefits were spread thinly

Budget 2022 gave something to everyone so cash benefits were spread thinly

Finance Minister Paschal Donohoe had a limited pot of €500m to spread around on tax measures in last Tuesday’s Budget. As has tended to be the case in recent budgets, for the most part, the Government gave something to everyone in Budget 2022 and as a result, the cash benefits were spread thinly across virtually all taxpayers.

All political parties will be only too aware that middle income families often miss out on most social welfare payments at budget time  and may inadvertently slip into the top rate of income tax too. After all, by comparison with other EU countries and also notably the UK, Ireland has a relatively low income threshold before reaching that top 40pc income tax rate. So what did we see in Budget 2022 which will be of interest to the “squeezed middle”?

Changes to income tax and Universal Social Charge (USC) bands will be welcomed by all income earners – as will the €50 increase in many tax credits. Indeed, for many middle income earners, the greatest benefit of Budget 2022 will be a reduced overall effective tax rate. For example, for a married couple with one earner on annual pay of €45,000, the combined impact of just those tax measures should deliver an extra €305 in take-home pay each year – or just under €6 extra per week. In other words, this couple’s effective rate of tax (including USC and PRSI) will fall from 12.7pc to 12pc from January 1, 2022.

There was welcome news also for those who will continue to work remotely. Minister Donohoe signalled that next week’s Finance Bill will include measures to give tax relief for up to 30pc of the cost of heat, electricity and broadband for those days spent working from home. Free GP care for six- and seven-year olds will also be good news for many families. While there are no changes to the basic rates of child benefit, there are further measures introduced which are aimed at increasing investment in childcare facilities. The Government also stated last Tuesday that it needs to address the cost of childcare.

The budget arithmetic was never going to permit solutions to address the many cost-of-living challenges that all taxpayers currently face. An increase in tax on petrol and diesel in this budget adds to those headaches. Minister Donohoe did recognise the current supply shocks and also the increase in living costs generally. We are all aware of shipping challenges with goods, labour shortages and rising energy costs. The Budget will not solve these particular issues. However, some homeowners will be fortunate to benefit from previously announced reductions in Local Property Tax (LPT) from 2022. This may go some way towards making up the difference.

For many taxpayers, perhaps the most welcome outcome of Budget 2022 is in what Minister Donohoe didn’t do. The reluctance to increase the 4pc rate of employee PRSI – as had been mooted in some circles during the summer – will be welcomed for now. However, it seems inevitable that something will happen soon on either PRSI rates or future state pension entitlements – including the age at which you can expect to draw down the state pension. All taxpayers will need to watch this space.

To end on a positive note, we will all have welcomed the Minister confirming a strong increase in jobs to date in 2021 and his further growth projections for 2022. For many, this will give optimism that we have already turned a corner in leaving the worst of the pandemic behind us.

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Pat Mahon is tax partner with PwC

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