Personal Tax & Employee Issues

Personal Tax & Employee Issues

USC, earned income credit, SARP, FED, PAYE, mortgage interest relief, home carer credits and CAT.

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Universal social charge

The majority of personal tax reductions in the Budget related to Universal Social Charge (USC). The Minister for Finance reiterated that these reductions signal the Government’s intent to phase out USC over time as resources permit, which is consistent with the Programme for Partnership Government.

In line with Budget 2016, the minister has focused on rate reductions rather than threshold increases although the rate reductions announced in Budget 2017 are less than those announced in Budget 2016. Each of the three lowest USC rates has been reduced by 0.5%. This continues the reduction in overall marginal tax rates, which commenced last year, with the marginal rate for those earning up to €70,044 reducing from 49.5% to 49%. For individuals whose income does not exceed €60,000 per annum, a maximum USC rate of 2.5% will be payable where that individual is a full medical card holder or is aged 70 or over.

The minister also announced a very slight widening of the band of income at which the reduced 2.5% USC rate applies from €18,668 to €18,772. This is intended to ensure that a full-time worker on the national minimum wage will not be liable for USC at a rate higher than 2.5%.

The maximum benefit to an individual from the above measures is €353 per annum i.e. €7 per week. It is expected that these measures will take effect from 1 January 2017.

Full details of the revised rates and bands are included in the Tax Rates and Credits 2017 table at the end of this publication.

Earned income credit

In last year’s Budget, the minister introduced an earned income tax credit of €550 per annum for the self-employed. This was intended to partly reduce the tax differential in how the self-employed and employees are taxed.

In line with his commitment last year to introduce further reform if returned to Government, the minister has announced an increase in the earned income tax credit to €950 per annum. It is expected that this increased tax credit will take effect for the 2017 tax year.

While this will be welcomed, a significant differential still remains in the form of:

  • (i) A difference of €700 between the PAYE employee tax credit and the earned income tax credit, and 
  • (ii) The self-employed earning over €100,000 being liable to USC at a rate of 11% whereas the maximum rate of USC payable on employment income is 8%.

Special Assignee Relief Programme (SARP)

The minister announced that the existing Special Assignee Relief Programme (SARP) is to be extended for a further three years from the end of 2017 until the end of 2020. This relief was introduced in Finance Act 2012 as part of the Government’s strategy to attract inward investment to Ireland. The aim of the programme is to encourage the relocation of key talent from within multi-national groups to Ireland.

The relief requires that a number of conditions are satisfied, including the requirement that the employee must have worked outside of Ireland for the same multi-national group for at least six months immediately before their arrival in Ireland. Where the necessary conditions are met, the relief provides for a 30% reduction in an employee’s taxable remuneration in excess of €75,000.

No changes were announced to the conditions to avail of the relief.

Foreign Earnings Deduction

The existing Foreign Earnings Deduction (FED) relief is being extended until the end of 2020, with some improvements to the relief. 

The relief was originally introduced in Finance Act 2012 with the aim of assisting companies to expand into emerging markets. The original relief provided for an income tax deduction up to a maximum of €35,000 for employees that spent a sufficient number of days working in Brazil, Russia, India, China or South Africa.

The Government improved upon the relief since its introduction with the list of qualifying countries gradually increasing to a total of 28 countries prior to Budget 2017. In his Budget speech, the minister added Colombia and Pakistan to the list of qualifying countries. In addition, the minimum number of days working abroad in order to qualify for the relief has been reduced from 40 to 30 days per annum. However, the income tax deduction remains capped at €35,000 per annum.

These amendments form part of the measures intended to encourage Irish businesses to seek out opportunities to grow their activities in international markets.

Consultation on PAYE modernisation

In his Budget speech, the minister announced the launch of a consultation process by the Revenue Commissioners on the modernisation of the PAYE system. This is the first major overhaul of the system since its introduction in 1960.

It appears that the proposed modernisation is focussed on using technology to report PAYE details to the Revenue Commissioners in real-time, similar to the real-time information system introduced in the UK in recent years.

The indicative commencement date for the new system is 1 January 2019 and the closing date for submissions from interested parties in response to the consultation paper is 12 December 2016. The consultation document sets out the potential benefits of upgrading the PAYE system, such as improvements in accuracy, ease of understanding, and transparency of the PAYE system.

It is also envisaged that the current PAYE reporting requirements would be integrated fully into employers’ regular payroll processes. This should eliminate the need to complete yearend documents such as P35s and P60s. Importantly, the consultation document notes that there is currently no proposal to change the due date for the remittance of the relevant payroll taxes by employers.

From an employee perspective, it is proposed that they would be able to claim various reliefs and tax credits such as relief for medical expenses before the end of the relevant tax year. Currently these can only be claimed after the end of the year. However, this would require employees to be in a position to avail of electronic reporting/ updating of data. It remains to be seen whether this will be achievable for all employees in practice.

A potential consequence of introducing a real-time payroll information system that is not mentioned in the consultation document is that the system could be used to more accurately means-test an individual claiming social welfare benefits. The use of the system in this manner may have data privacy implications that would need to be considered.

It is expected that the process of designing the new system will involve considerable communication between the various stakeholders.

Apart from the time involved in obtaining agreement on the design of any new system, practical issues (both on initial setup and recurring) that will need to be resolved include how to deal with:  

  • (i) The time required for payroll software providers to fully understand the requirements of any new system and write appropriate updates to their software
  • (ii) Any update by employers of personnel records that are currently incomplete 
  • (iii) Potential time lags in obtaining PPS numbers for secondees
  • (iv) The timely availability of information to correctly assess share-based remuneration, particularly for employees who have worked in multiple jurisdictions As mentioned above, a similar realtime payroll information system has been introduced in the UK recently.

It is hoped that we can leverage the experience in the UK to overcome any potential teething difficulties, and that the system would be introduced on a phased basis similar to the approach taken to mandatory Revenue Online Service (ROS) filing and iXBRL accounts filing requirements.

Mortgage interest relief

The minister announced his intention to extend mortgage interest relief beyond December 2017 out to 2020, the details of which he said will be set out in Budget 2018. It is possible this extension will only apply to those already qualifying for mortgage interest relief up to December 2017. Any extension would be a welcome relief particularly for individuals who took out loans between 2004 and 2008 where relief was available at a rate of 30%.

The delay in announcing the details until Budget 2018 will cause operational challenges for lenders who operate the relief at source as they will presumably be required to implement any such changes by 1 January 2018. The delay will also create uncertainty in evaluating repayment solutions for mortgage customers in difficulty.

Home carer credit

The home carer credit is intended to assist families who care for a child or dependent relative in the home. This is achieved by giving the carer’s spouse/ civil partner an additional tax credit against the tax payable on their income.

In last year’s Budget, the minister announced an increase in the credit from €810 to €1,000. The Budget 2017 measures include a further increase in the tax credit to €1,100 per annum.

The full tax credit is available where the carer’s income is €7,200 or less. A reduced tax credit will apply for incomes up to €9,400 (previously €9,200).

It is expected that the above will take effect for the 2017 tax year, and it is hoped that further increases in the tax credit will be delivered in future Budgets.

CAT thresholds

The minister’s Budget announcements included an increase in the tax-free thresholds that apply for capital acquisitions tax (CAT) purposes. CAT applies at a rate of 33% where the aggregate value of gifts and/or inheritances received since 5 December 1991 exceeds the relevant tax-free threshold.

In making the announcement, the minister referenced increasing asset prices and higher tax liabilities on passing family homes as being the driver for this increase. The Class A tax-free threshold that applies to gifts/inheritances by a parent to a child is to be increased from €280,000 to €310,000. The minister also announced 8% increases to the Class B and Class C tax-free thresholds. While this is still significantly lower than the tax-free thresholds that applied in 2009, it is a move towards restoring the historic position.

Neither the Budget speech nor the accompanying documents confirm the commencement date for these changes.

Full details of the revised tax-free thresholds are available in the Tax Rates and Credits 2017 table at the end of this publication.

Taxing Times: Budget 2017 & Current Tax Developments

Taxing Times: Budget 2017 & Current Tax Developments

Budget 2017 is the second budget in a row where the choices have been about how to distribute benefits; read our professional tax analysis.

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Budget 2017

An overview of changes outlined in Budget 2017.