Budget Day falls on this newspaper’s publication day so I can only speculate as to whether Minister Noonan has delivered on any of the well flagged changes – to possibly lower the hated Universal Social Charge (USC), to widen tax bands and make good on higher child benefit payments.
Will he also offer more early childhood education hours or provide tax relief for high child care costs? Will pensioners get a part or whole restoration of their Christmas bonus or even an increase in the State Pension – the first in nearly seven years?
Any tax breaks will be welcomed by the 1.28 million people who earn more than €17,576 and now hand over an average 7% USC (8% for earners over €70k).
A single person will also pay 4% PRSI and 40% income tax on every extra euro they earn over €33,800. That 51% deduction applies on earnings above €42,800 for married couples with just one earner and to dual earner married couples with income of €67,600.
However, the cost of raising the marginal tax entry point for all these people and dropping the USC from 7% to 6% will cost the Exchequer €173.4 million and €364 million respectively, according to the Irish Tax Institute or €537.4 million in total.
That’s already slightly over a third of the surplus €1.5 billion commentators have suggested that Mr Noonan has to give back to the nation’s hard-pressed taxpayers and doesn’t even include the pay and pension levy restoration expected by public servants.
If the Minister limits his giveaways to just €1.5 billion (and not the €2.5 billion the anti-austerity opposition claim he should spend) then there doesn’t look like there will be much relief of any kind for the one group of workers in the State who have been singled out for higher taxes: (I need to declare here that I’m one of them.)
In their recent Budget Book 2016, the Irish Tax Institute looked at the tax position of the 327,500 registered self-employed and sole trader workers in this country. It found that the self-employed are subject to three tax differentials compared to employed workers:
* They pay an additional 3% USC rate –11% – on ALL income over €100,000. The highest rate of USC for employed workers with earnings in excess of €70,000 is 8%.
* 303,200 do not receive the €1,650 credit that PAYE workers receive.
* They receive limited PRSI benefits for their 4% insurance contributions compared to employed workers. Low earning self-employed workers – ie those earning over €5,000 but less than €18,303 will pay the 4% PRSI charge on all this income or €732. An employed worker with the same earnings will pay no PRSI whatsoever.
The earnings differential is even more severe for higher earning self-employed or sole traders compared to employed workers, said the Tax Institute.
A self-employed person with annual turnover of €120,000 from which they must meet all their business expenses including their own wages and pension contributions, will pay €53,034 income tax, USC and PRSI.
The employed worker earning €120,000 (but without business expenses and perhaps receiving a pension contribution from their employer) will pay €50,784 in income tax, USC and PRSI.
Unfortunately, revoking the higher 3% USC to the 1% of self-employed workers who pay it would cost €125 million and awarding an equivalent PAYE-type credit of €1,650 to them would cost another €470 million.
Last year the Exchequer collected €37.73 billion worth of income tax, €3.65 billion in USC and €8.19 billion in PRSI from the 1.73 million taxpayers. There are currently 663,000 workers outside the tax net – 28% of all earners. The tax and USC changes in this budget could reduce that number by another 90,000 and bring the percentage of non
income tax and USC payers to 31%.
No matter what some people say, our income tax system is highly progressive with the top 1% paying 19% of all income tax and USC and the top 9% paying 54% worth. Everyone else – the remaining 91% of workers in the shrinking tax base – pay the 46% balance.
With the election looming, this will be the most crucial and the most political budget Michael Noonan will probably ever deliver.
Can he bring more fairness into the system? (Why doesn’t everyone earning over €120,000 pay the extra 3% USC?) Can the state really afford to keep shrinking the size of the tax net?
The self-employed are just one interest group who will be hoping for a little extra relief from this budget but the 55% marginal tax those earning more than €120,000 is one of the reasons why we lag other EU countries in the numbers who start their own businesses.
Next week: Best savings options for your Budget 2016 windfall.
Do you have a personal finance question for Jill? Write to her at Jill Kerby, The Munster Express, 37, The Quay, Waterford X91 DC83 or by email: firstname.lastname@example.org