CONTINUING our expert comment series, Paul Nestor, Taxation Partner from BDO Simpson Xavier, provides an overview on the implications of the supplementary budget presented by Government last Tuesday.
“The Budget presented this Tuesday was one of the toughest the country has seen in many years. Given the Minister’s stated intention to bridge the gap between revenue and expenditure over the next few years to stabilise public finances,
it was not surprising that tax rates were significantly increased. However, the main welfare rates were left untouched, but with the proviso that the rates would be revisited in next Budget and that there will be no payment of the Christmas Bonus in 2009.
“From a taxation perspective, the middle income and high earners bore the brunt of the tax increases. The income levy which was introduced from 1 January last has been doubled from 1 May next and the applicable rates are as follows:
Euro income levels – Rate of income levy
0 – 75,036 – 2%
75,037 – 174,980 – 4%
Over 174,980 – 6%
“The levy does not apply where income does not exceed 15,028 euro. However, the income assessable to the levy is before deductions such capital allowances and pension contributions and therefore operates to collect more tax for the Exchequer than increases in income tax rates.
“The health levy has also been doubled from 2% and 2.5% to 4% and 5% respectively. The higher rate will be applicable to income levels over 75,036 euro. The PRSI ceiling for employees has also been significantly increased from 52,000 to 75,035 euro. Mortgage interest relief will no longer be available from May 1 next where the mortgages have been in existence for more than 7 years.
“Deposit interest will now suffer DIRT at 25% with immediate effect, an increase of 5% from 2008.
As noted previously, the main welfare rates have not been amended. However, the Early Childcare Supplement has been halved from 1 May and will be abolished at the end of the year. The provision of a 1 year free pre-school programme is to be introduced as a replacement measure.
The above changes represent a significant loss of net income. For example, a married couple with one income and two children under 5 under the PAYE system will pay additional taxes of approximately 3,100 and lose 1,000 euro in the early childcare supplement. A reduction of approximately 4,100 euro in their net income. Â This does not include any loss in mortgage interest relief if the mortgage is in existence for more than seven years.
Capital Gains Tax and Inheritance/Gift tax has been increased to 25%. Furthermore, the tax free thresholds below which no inheritance/gift tax is payable have been reduced by 20%. For example, where a parent makes a gift to a child the threshold is now 434,000 from 542,254 euro.
In summary, the tax increases significantly impact net incomes of individuals. Whether this reduction in spending power will further impact consumer confidence and further contract the economy will only be known with the passage of time. Â However, given the exchequer deficit it is likely that another tough budget will be presented next December which will further reduce net incomes and thereby the standard of living across the board.
