12 Oct 2017 | 10.45 am
Budget 2018: Personal Tax Issues
There are welcome changes to income tax band marginal rates in Budget 2018
12 Oct 2017 | 10.45 am
The maximum benefit to any individual from the new USC rate reductions is limited to €178 per annum, writes Robert Dowley (pictured), Partner at KPMG
Universal Social Charge
Once again, the reductions to USC announced in the Budget were well flagged in advance in media commentary. In keeping with previous government pronouncements, the reductions are targeted at low-to-middle income earners, being those earning up to €70,044 per annum.
The measures are also aimed at reducing the USC rates without narrowing the USC tax base. As such, the minister announced there would be no change to the USC entry point of €13,000. However, the 2.5% rate will be reduced to 2%, and the ceiling at which this rate applies will also be increased from €18,772 to €19,372.
This increased ceiling should ensure that full-time workers on the increased national minimum wage of €9.55 per hour do not pay the upper rate of USC.
The USC rate applying to income between €19,373 and €70,044 is also to be reduced by 0.25% to 4.75%. This change results in a reduction from 49% to 48.75% of the marginal aggregate rate of USC, income tax and PRSI for those earning up to €70,044.
The oft-cited employee marginal rate of 52% (comprising income tax, USC, and PRSI) will continue to apply for incomes above this level, and a marginal rate of 55% will continue to apply to self-employment income above €100,000.
While the above measures should benefit all taxpayers, the maximum benefit to any individual is limited to €178 per annum. It is expected that all of the above measures will take effect from 1 January 2018.
Those holding full medical cards or aged over 70 and earning up to €60,000 annual aggregate income currently benefit from a 2.5% cap on USC rates that was due to expire on 31 December 2017. This cap is being extended for a further two years and is being reduced to 2%.
The combination of these changes means that an aggregate marginal rate of income tax and USC of 42% should apply for those earning less than €60,000 per annum who are either (i) full medical card holders, or (ii) over 70 years of age.
The minister also announced that a working group will be established in the coming year to plan the amalgamation of USC and PRSI over the medium term, in order to ensure Ireland’s personal tax system is competitive and resilient in the future. Of particular note is the minister’s stated intention that any such integration should not narrow the tax base. It is anticipated that this initiative will be a complicated process and developments are awaited with interest.
Income tax bands
In an anticipated and welcome change, the minister announced that the level of income at which people begin to pay the marginal rate of income tax of 40% is to be increased for 2018. The increase of €750 will result in a single person reaching the higher income tax rate at a level of €34,550. Single-income couples, married or in a civil partnership, will reach the higher tax rate at income levels of €43,550. The maximum annual benefit of this change amounts to €150.
Earned income credit
The earned income credit was introduced from 2016 to reduce the differential in taxes payable by employed and self-employed individuals. The minister announced that the credit for 2018 will increase by €200 to €1,150.
Although this is more than double the level of €550 at which it was originally introduced, it is still €500 lower than the PAYE tax credit of €1,650 that is available to employees. On a related note, there has been no equalisation of self-employed and employee PRSI.
Home carer credit
Continuing a trend from the last two Budgets, the home carer credit is to be increased for 2018. This year’s change will see the full credit increase by €100 to €1,200 for the year. The full credit will be available where the carer’s income (excluding Carer’s Benefit and Carer’s Allowance) is €7,200 or less, with a tapering credit available to those with income between €7,200 and €9,600.
Mortgage interest relief
Mortgage interest relief is generally only available in respect of owner-occupied residential mortgages drawn down between 1 January 2004 and 31 December 2012. The relief permits a tax deduction for between 15% and 30% of qualifying mortgage interest and is also subject to a ceiling ranging from €3,000 to €20,000, depending on the year in which the mortgage was drawn down.
The relief was due to terminate at the end of 2017. However, on Budget Day last year, the former Minister for Finance, Michael Noonan, signalled that mortgage interest relief would be extended to 2020. Minister Donohoe this week confirmed that this extension will be by way of a tapering provision to phase out the relief between 2018 and 2020.
The relief for each of those years will be 75%, 50%, and 25% respectively of the existing relief available in 2017. As lenders operate this relief at source, they will undoubtedly face operational challenges in ensuring that their systems are appropriately updated to reflect this measure by 1 January 2018.