Read the Personal Tax & Employee Issues section of our Budget 2016 publication, Taxing Times.
The USC changes have been targeted at those earning between €12,012 and €70,044, which the Government views as low to middle incomes.
The impact of the changes should result in a benefit equivalent to an additional week’s net pay for an individual earning €70,000.
The maximum rate of tax for all those earning under €70,044 has been reduced to 49.5%, the first time that this rate has been under 50% since the supplementary Budget of April 2009. This has been achieved by reducing (i) the two lower USC rates by 0.5% each and (ii) the 7% rate by 1.5%. Full details of the revised rates and bands are set out in the tax rates and credits section at the end of this publication.
The change in rates also means that the top rate of USC is limited to 3% for (i) those with medical cards and (ii) those aged 70 years and over with income of €60,000 or lower.
The USC entry threshold is to be increased to €13,000, a move that will remove 42,500 additional workers from the scope of the charge. The USC was originally introduced in order to broaden the tax base, but successive Budgets have narrowed its application by eliminating a relatively modest charge on a large number of people – a person with income of €12,999 in 2015 has a USC liability of €215.
All of the above changes will come into effect from 1 January 2016.
The marginal tax rate for those earning above €70,044 has not been changed and continues to be 52% for employees and 55% for the self-employed. However, individuals earning above €70,044 also benefit from the USC reduction in respect of their income up to €70,044.
A ‘home carer tax credit’ of €810 is currently available to families where one spouse/partner is the main carer of a child or dependent relative as long as that person’s total income is less than €5,080, with tapering relief available for those with income of up to €6,700.
For 2016, the credit available is to be increased to €1,000 and the income threshold is to be increased to €7,200. It is assumed that tapering relief will continue to be available and that this will apply for income up to €9,200.
Two changes to PRSI were announced by the minister in his Budget speech.
The first is an increase in the threshold weekly earnings at which the 10.75% top rate of employer’s PRSI applies. From 1 January 2016, the 10.75% rate will only apply to those with weekly earnings in excess of €376 (previously €356) i.e. annualised income of €19,552.
In addition, partial relief of up to €12 per week from employee’s PRSI is to be introduced for those with weekly earnings between €352 and €424. No employee PRSI is due on weekly earnings of €352 or less.
In advance of the Budget, the Government had indicated a strong desire to bring the tax burden on selfemployed individuals closer to the level applicable to employees. The current disparity between the taxation of these two groups is comprised of two parts, the first being the availability of a tax credit of €1,650 to employees only and the second being an additional USC surcharge of 3% that applies to self-employment income in excess of €100,000.
The minister made a small change in this Budget, by introducing an ‘earned income credit’ of €550 for the selfemployed from 1 January 2016. This credit will be available to all those with trading or professional income who are ineligible for the employee tax credit on their earnings.
It would appear that the minister has chosen to address the difference in tax credits in priority to the USC differential in order to focus the tax reductions on small business owners, where the benefit of the credit should represent a higher proportion of their net income. However, the earned income credit is only one-third of the tax credit that has been allowed to employees for many years.
The ‘Tax and Entrepreneurship Review’ published with the Budget documents has sought to justify the continuation of this differential by suggesting that there are aspects of how the self-employed are taxed which can be beneficial to them, including timing benefits and the availability of deductions for expenses.
The validity of these justifications is certainly arguable, but regardless of the merits the ‘Tax and Entrepreneurship Review’ gives an insight into current Government thinking on this issue. Whether we will see a further narrowing of the gap is uncertain, but the minister has committed to introduce further change should the Government be elected for a further term in office.
During the speech, the minister referred to a number of reviews that will be carried out in 2016 to determine what, if any, taxation measures might be implemented in future Budgets in certain areas.
Treatment of trade union subscriptions and professional body fees
This area has been the subject of lengthy and protracted discussions with Revenue in recent times, particularly during PAYE audits.
Prior to 2011, an employer’s payment / reimbursement of an employee’s annual membership fees of a professional body did not give rise to a taxable benefit-in-kind (BIK) provided the employee’s membership of that body was relevant to the business of the employer, and membership was either (i) necessary for the performance of employment duties, or (ii) facilitated the acquisition of knowledge necessary or directly related to the performance of those duties. This exemption was removed for 2011 onwards such that a BIK potentially arises unless it can be shown that the annual membership fees are an expense incurred ‘wholly, exclusively and necessarily’ in the employee’s performance of their duties. This change has resulted in Revenue contending that unless membership of the particular body is an express contractual obligation of the employee under their employment contract, a benefit in kind will arise.
It is hoped that any consultation on this issue will reinstate the prior treatment of these costs.
Taxation of trusts and income of trustees
It is unclear whether this review will be confined to Irish trusts or whether it will extend to foreign trusts. It is also unclear whether the review will extend to the taxation of trusts and trustees only, or whether the review will extend to the tax position of settlors and beneficiaries, all of whom may have complex tax profiles. It would be hoped that the review will address the annual surcharge on undistributed trust income and the discretionary trust taxes.
Given the range of taxation issues associated with trusts and the number of parties involved, we await with interest the publication of the consultation document.
Review of the artists’ exemption
As part of the normal review of tax reliefs, the artists’ income tax exemption was reviewed. Four options were examined: (1) abolish the scheme; (2) introduce income averaging; (3) change the level of exempt income; or, (4) amend the definition of artistic work.
The conclusion of the review was that the artists’ exemption was a very valuable support for artists on lower incomes. Therefore, no change to the scheme was recommended. However, an in-depth analysis of introducing income averaging for artists will be carried out next year.
Earlier this year, the Minister for Finance commissioned Dr. Don Thornhill to conduct a review of the operation of the Local Property Tax (LPT), and, in particular, the likely impact on LPT liabilities due to property price increases.
The introduction of LPT in 2013 required homeowners to file LPT returns and pay the tax in respect of around 1.9 million properties. The first valuation date was 1 May 2013. The valuations declared in 2013 form the basis for the LPT liabilities for 2013 (half year), 2014, 2015 and 2016. The next valuation date was due to be on 1 November 2016 and was to determine the basis for the LPT liabilities for 2017, 2018 and 2019.
In his Budget Statement, the minister outlined the postponement of the next valuation date for LPT from 1 November 2016 to 1 November 2019 as recommended by Dr. Thornhill. This is a positive step for homeowners and will mean that there will be no increase in LPT in 2017 as a result of increased property values as the LPT liabilities will continue to be based on the 1 May 2013 valuations. Dr. Thornhill’s report estimates that more than half of properties would move up by at least one band based on current property prices. It should be noted that Dr. Thornhill stressed in his report that any deferral to the valuation date should be accompanied by legislative changes to reform the LPT system.
The minister has also accepted Dr. Thornhill’s recommendation to continue to exempt from LPT certain properties damaged by pyrite. Finally, the minister outlined that the thirteen recommendations made in Dr. Thornhill’s report will be considered in more detail in due course.
2014 introduced the Home Renovation Incentive (HRI) Scheme for individuals who renovate or improve their principal private residence located in the State. The relief is provided by way of a 13.5% income tax credit on qualifying expenditure of between €4,406 and €30,000 (before VAT) paid to qualifying contractors, i.e. the relief is capped at €4,050. The credit is granted in the two years following the year in which the work is carried out. The HRI seeks to incentivise individuals to upgrade their homes using tax compliant contractors, and it has proven to be very successful. The scheme was extended last year to include rental properties owned by landlords subject to income tax.
It was originally intended that the HRI would cease at the end of 2015. However, the minister confirmed that this relief is being extended until 31 December 2016. The estimated cost of this extension is €19 million.
The current Group A tax free threshold which applies to gifts and inheritances from parents to their children is being increased from €225,000 to €280,000. This applies in respect of gift and inheritances received on or after 14 October 2015.
Although this increase to the Group A tax free threshold of almost 25% is to be welcomed, it should be borne in mind that this threshold reduced from €542,544 since 2009 to the current level. In light of rising property prices throughout the country, particularly in Dublin, the capital acquisitions tax liability on inheriting a family home can still be burdensome in many cases. It is hoped that this threshold be kept under review as property prices continue to recover.
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