The slippery slope; cold comfort; news of trips, slips and falls; cuts; expecting a bruising; and the pain may last not just for days, but weeks, months and years – no, we are not talking about the weather but Budget 2011! The past few weeks have seen the weather used as a metaphor for a series of Government announcements about the way employers, employees and non-employed people will be taxed and receive credits, reliefs and benefits over the next few years. In this special issue we focus on how Budget 2011 (and its successors) will impact you. There is no sign of a thaw on the horizon, get ready to dig deeper!
The shape of things to come was already obvious from early this morning: the most significant news events of the day occurred at 08:00 when a ‘cherry picker’ arrived outside Government Buildings; at 10:40 am with the news the EU Finance Ministers had formally approved Ireland’s €85 billion rescue package; at 11:40 when more independents and semi-detached Fianna Fáil backbenchers announced that they “might not support the Budget unless”; and at 12:40 when Bank of Ireland’s ATM machines froze … and during all of this time Dáil business was officially suspended!
With the prospect of a general election that may see this Budget replaced by a ‘mini budget’ in the first half of next year, based primarily around Fine Gael’s or Labour’s proposals, Minister Lenihan’s Budget speech today may only hold hard for the first half of 2011. Budget 2011 has fleshed out some of the detail of what we can expect from the four-year long National Recovery Plan – at least from the current government perspective – but it is already skating on thin ice.
Against a background of high unemployment, a Live Register that tops 452,000 citizens and political uncertainty we summarise the proposed changes that will affect employers, employees and the non-employed, look at the likelihood of the changes announced today actually being put through, and suggest some additional changes which may be brought in next year.
VAT
There will no increase in the standard rate of VAT (currently 21%) in 2011 or 2012 which will give many businesses and employees an amount of certainty in planning pricing and expenditure over the next two years.
In 2013 the standard rate is set to increase to 22% with a further increase to 23% planned for 2014. The main opposition parties broadly agree with this strategy and it is one of the least contentious issues in this year’s budget. Despite some lobbying from retailers in border areas it is important to note that many other EU countries have similar or higher rates, so the Irish VAT rate will be brought more in line with the rates of our main trading partners over the life of the National Recovery Plan. It is likely to stay at that level in future years.
The lower rate on labour intensive services (i.e. the 13.5% rate) will be left unchanged over the next four years. Should Fine Gael be elected to government in the Spring they promise to make a 1.5% cut in the lower rate in order to re-direct consumer spending away from imports, and into labour-intensive, domestic services such as trades, restaurants, hotels and newspapers.
The National Recovery Plan also proposes, a ‘rebalancing of the VAT system and the application of the zero rate of VAT’. This may mean that some services move to the lower rate or the standard rate. This may see the zero rate of VAT that applies to some personal services and certain products such as books and children’s clothing come into the tax net again.
It makes sense for businesses to front-load expenditure on employment-related capital items into 2011/2012 e.g. if your company provides a company car or van to employees it will make sense to purchase any replacement vehicles within the next two years. Other areas of cost to consider in relation to front loading capital expenditure are spend on machinery, computers, furniture, fixtures and fittings. A case of ‘Buy Now, Get One Cheaper’!
Where an employer is paying for personal services on behalf of an employee, e.g. sponsoring an employee on a college course, consideration should be given to front-loading this spend as well. As the ‘students contribution charge’ is also to rise from €1,500 to €2,000, and further increases are expected in future, there is likely to be a double saving on this.
If the services you provide are currently zero-rated or have the possibility of being included in Fine Gael’s proposed new list of 13.5% VAT rated items get in contact with your trade body and ensure that they lobby government to keep it or include it at the lower rate.
Excise Duties and Air Travel Tax The Minister has signalled that there will be small adjustments to excise duties and licences in 2011 to result in increases of €110m per annum in the tax take which is a slightly larger take than usual. There are three categories of excisable products - mineral oils, alcohol and alcoholic beverages, and manufactured tobacco and excise duties are also chargeable on certain premises or activities (e.g. on betting and licenses for retailing of liquor).
The key changes announced today are:
Duty on petrol will increase by 4 cent and auto-diesel by 2 cent from midnight.
The Air Travel Tax has been reduced to €3 on a trial basis. Minister for Tourism, Mary Hanafin gave strong indications at the launch of Tourism Ireland’s Marketing Plans for 2011 that the Air Travel Tax would be changed. It currently applies to aircraft capable of carrying 20 or more passengers (€10 per passenger) and to airports where the number of passenger departures in the previous year was more than 50,000. The €2 reduction is expected to be followed by the relaunch of a route incentive scheme from the Dublin Airport Authority (DAA) and rebates for airlines on passenger charges by the Authority if certain capacity levels are reached. In their proposed budget announcements both Fine Gael and Labour have also said they would abolish the travel tax subject to deals on re-opening routes with Ryanair and Aer Lingus who account for 80% of passenger numbers through Irish airports and who would be the main beneficiaries of such a scheme. The number of visitors to Ireland in the first nine months of this year amounted to 4.6 million, down 16 per cent on the same period of 2009. Aer Lingus announced a fall in passenger numbers for November today.
The introduction of a betting tax to ensure online transactions are taxed at the same level as retail bets.
As excise duty, tax and licence increases tend to be introduced in the Budget each year people can do a little by ensuring they spend on items such as alcohol and tobacco prior to Budget Day.
Make sure to fill up your fuel tanks tonight and again before next year’s Budget!
Corporation Tax Ireland’s corporate tax rate stays at 12.5% and remains among the lowest in the EU. The Government has been at pains to explain that the EU/ECB/IMF deal for Ireland does not require changes to this rate. Two weeks ago, however, eight MEPs signed a declaration pushing for Ireland’s rate to increase so the issue has not gone away. The European Commission is planning to propose a corporate tax base harmonisation across the EU, but told People Matters that it could not impose a 25% rate as MEPs have proposed as Commission proposals on tax require unanimous voting. This is one of the few issues on which there has been true cross-party support – even Sinn Fein’s budget plan fails to mention an increase this year!
The extension of the three year corporate tax exemption for start ups is to be extended and the relief will be linked to employers PRSI.
Income Taxes The Minister for Finance stated in the National Recovery Plan that the income tax system will be rebased at approximately 2006 levels over the life of the National Recovery Plan. The 2006 level referred to as a measure of the overall Income Tax receipts and the Minister acknowledges that this outcome can be achieved through a combination of measures including changes to tax rates and bands or restructuring PRSI and the associated levies on income over the next four years. The Plan also states that income tax changes are to be front-loaded so that 65% of the change occurs in 2011:
The after-tax income of a single person earning €55,000 will fall by €1,860 a year, or about €36 a week, a drop of 4.8 per cent.
The after-tax income of a married single-income family earning €55,000 will fall by €2,310 a year, or €44 a week; a fall of 5.4 per cent.
As a result of changes to pension reliefs, the after-tax income of a person earning €55,000 who contributes to a private sector pension will fall by a further 2.5 per cent by the end of 2011.
With the prospect of a general election early in 2011 the changes outlined above may not be fully implemented in reality. One scenario is that Labour and Sinn Fein may have an influence beyond their current size and both parties are proposing a third rate of tax at 48% on joint incomes over €200,000 (single incomes over €100,000). Furthermore Labour has suggested a reduction in the personal credit of €250.
Should Fine Gael make up all or part of the next government it is opposed to proposals to raise either the standard 20% or the top 41% rate of income tax as it feels that combining income tax, PRSI and income levies, the top rate is already 51% for income earned over €36,400 per annum (for a single PAYE worker) and rises to 56% for self-employed people. One of the ‘three pillars’ of Fine Gael’s proposed budget involves limiting tax increases to one-quarter of the adjustment next year, and one-third of the adjustment over four years. Fine Gael proposes no income tax increases in 2011 ‘before recovery takes hold’, and limiting income tax increases to half the levels proposed by Fianna Fáil over the entire four years of the National Recovery Plan.
In the meantime, however, the Minister confirmed that current income tax rates of 20% and 41% will remain in place in 2011.
The Croke Park deal which protects the pay of public service workers remains unaltered in the National Recovery Plan but new entrants to the service will start on 10 per cent less than existing salaries and their pension entitlements will be considerably less generous. Labour has suggested extending the deal with a general wage freeze for all workers whether in the public or private sectors.
Various parties have suggested caps on pay for senior civil servants and politicians (ranging from €250,000 down to €100,000) and the Government has responded by setting a maximum of €250,000 for the President and others. Sinn Fein have suggested a popular concept which is to cap the ceiling of senior public servants in each Department at a multiple of entry level pay e.g. if a new entrant earned €25,000 the head of the Department would earn a maximum of €100,000 - four times the entry level.
Public sector employees will have to work harder too as there will be a reduction of 24,750 in the numbers employed in the public service over the period by 2014 compared to 2008, with half of this having already been achieved over the past two years.
Work practices will be reformed to allow for flexibility and more efficient services.
If you plan to take up a new position in the public sector make sure to sign your contract before the year end.
If you are a public sector worker earning over €250,000 – leave when your fixed term contract comes to an end!
If you are planning to retire from the public service follow the lead of Dermot Ahern and make sure that you do so before changes to pensions come into effect in 2011 (see below).
Tax Bands
The main way that the Government has of increasing income tax in the short term is by widening the tax base. Many of those who do not currently pay income tax can expect to do so in future. The National Recovery Plan states that it is “not sustainable” to have 45 per cent of working people paying no income tax and that a 16.5 per cent reduction in the value of tax bands and credits will be introduced overall.
The lowering of the lower threshold for income tax bands is one of the most significant changes in taxation and is expected to raise €1.245bn in 2011.
The main changes to the tax bands announced today are:
A reduction in the Single/Widowed band from €36,400 to €32,800.
For a person Married One Income it reduces from €45,400 to €41,800; Married Two Incomes* from €72,800 to €65,600 with a maximum transferability between spouses of €45,400 in 2010 and €41,800 in 2011.
A reduction in the One Parent/Widowed Parent band from €40,400 to €36,800.
Tax Credits
Most tax credits remained untouched in Budget 2010 but the National Recovery Plan allowed for some specific changes in the Income Tax Age Credit and the Income Tax Age Exemptions are to be phased out over the next four years. Tax experts have been expecting a 10% decrease in the average value of tax credits in Budget 2011 (about €400 per tax payer). The main aim is to bring 60% of adults within the tax net (the figure is currently less than 50%). The main proposals in relation to tax credits are:
Employee Tax Credit reduced from €1,830 to €1,650.
Personal Tax Credits reduced from €1,830 to €1,650 for a single person and €3,660 to €3,300 for a married person.
Similar reduction for a widowed person bereaved in year of assessment from €3,660 to €3,300.
Reduction in the One Parent Family Tax Credit by €180; the Home Carer Tax Credit by €90; Dependent Relative Tax Credit by €10; Incapacitated Child Tax Credit by €360; Blind Persons Credit by €180 and €360 for a couple.
The additional credit for certain widowed persons is reduced by €60.
The Widowed Parent Tax Credits are reduced by approximately €400 per annum.
The Age Credit is reduced by €80 for a single person and €160 for a married couple.
Age Exemption Limits will reduce for a Single person from €20,000 to €18,000 and double that amount for a married couple (€40,000 to €36,000.
Fine Gael has suggested that a 50% reduction in the income tax age exemption limits and in the age credit, so that those over 65 are taxed on a similar basis to those under 65.
Make sure that you are paying income tax based on the correct bands.
Ensure that you are availing of your full tax credits. Visit http://www.revenue.ie/en/tax/it/leaflets/it1.html#section1 which will be updated with thesechanges in the coming days to see which credits you are entitled to. One of the credits which is frequently unclaimed is the One-Parent Family, Widowed, Deserted, Separated or Unmarried (with qualifying dependent children) credit and Revenue also say that many carers fail to claim their credit. A tax credit at the standard rate of tax (20% in the tax years 2009 and 2010 is available for married couples where one spouse (the 'home carer') works in the home caring for one or more dependent persons, i.e. a child for whom they are entitled to Social Welfare child benefit, a person aged 65 or over, or a person who is permanently incapacitated by reason of mental or physical infirmity and the qualifying person normally resides with the couple for the year. A reduced tax credit applies where the income is between €5,080 and €6,880 in 2009 or 2010. Additional tax relief is available for people who have been unemployed for one year or more and who take up a qualifying job. This relief is also available for persons who have been in receipt of either Disability Allowance, Blind Person’s Pension or Invalidity Pension for 12 months or more, Illness Benefit for 3 years or more or released after 12 months or more in prison.
PRSI and the Universal Social Charge
The Government will extend the existing Employer PRSI Incentive Scheme until the end of 2011 although Labour has suggested an extension of the exemption period to 18 months, to incentivise employers to employ people who have been on the live register for six months or more.
In the last Budget the Minister for Finance said that the existing PRSI, Health and Income Levies will be subsumed into one universal social charge. In reality the Health Levy and Income Levy are to be abolished and replaced by a new Universal Social Charge on a revenue-neutral basis, will be introduced in 2011, at the following rates and thresholds:
0% < €4,004
2% €0 to €10,036
4% €10,037 to €16,016
7% > €16,016
The €75,000 ceiling on PRSI has been abolished as part of this transformation creating an effective increase in taxation for those on higher earnings. New PRSI rates will be introduced for higher earning public servants.
During the National Recovery Plan period there will also be abolition or restriction of the levy charges on Approved Profit Sharing Schemes; Approved Save-As-You-Earn Schemes; Unapproved Share Options; and Share Awards but the timing of these changes has not been agreed yet.
Fine Gael has promised, if elected, to abolish the lower 8.5% rate of employers’ PRSI on staff earning below €356 per week for at least three years in order to reduce employment costs and offset the effect of another of its proposals - not dropping the minimum wage (see below). Sinn Fein supports the idea that the government abolish the PRSI ceiling; abolish PRSI exemption for share options; abolish the income tax exemption for share-option schemes; and adjust PRSI on share-based remuneration and Capital Gains (TASC recommends treating all income the same and as such, PRSI should be applied).
With changes in employment and social welfare circumstances over the past few years many individuals may not be aware that they do not have to pay the levy. For example, many who previously paid for GP and medical expenses themselves but who now hold full medical cards (A 'GP only' medical card is not a 'full' medical card) did not have to pay the levy in 2009 and 2010 and can now reclaim it.
Individuals whose annual income does not exceed €15,028 were also exempt, as were individuals aged 65 or over whose annual income did not exceed €20,000.
Married couples, one or both of whom are aged 65 or over, whose combined income for the year does not exceed €40,000 also qualified for exemption, although this is set to go in 2011.
All Social Welfare payments are also exempt from the Income Levy.
Property and Wealth Taxes
A flat rate 1% stamp duty is being introduced on all residential property transactions up to €1 million and 2% on transactions over €1 million will be introduced from midnight tonight. Reliefs on stamp duties are to go.
Although a property tax is not being introduced in 2011 an interim Site Value Tax will be introduced in the last quarter of 2011 or first quarter of 2012. This tax will apply to all land other than agricultural land and land subject to commercial rates. It will consist of a fixed local service contribution of about €100 per annum per household initially.
The full Site Value Tax will be introduced in 2013 when valuations of sites have been completed and will apply to about 1.8 million households as well as zoned lands that would equate to an estimated further 700,000 houses. The annual Site Value Tax will amount to just over €200 per dwelling (or site) on average. The Minister stated that this site charge will be fixed at €100 per annum for certain categories of households (e.g. pensioners).
For those moving into the housing market for the first time there is the news that most loans taken out on or after 1 January, 2013 will no longer qualify for mortgage interest relief, which is to be abolished completely by 2018. Sinn Fein has suggested that home loans taken out by landlords should not qualify for this relief from 2011 onwards.
There is good news for those who are trading down, however, with the news that stamp duty will be abolished on sales of properties where families are downsizing.
Most parties have proposed an increase in the second home tax of up to €600 per annum. Sinn Fein has also suggested a tiered system for third and subsequent houses e.g. €700 for a third house, €800 for fourth and fifth house, and so on. They have also suggested that the Government examine the introduction of an income-linked waiver for individuals with second homes who cannot sell them in the current climate, are struggling to meet mortgage repayments, or are in financial difficulties.
In its National Recovery Plan the Government said it is committed to the phased abolition of several property-related legacy reliefs (also know as the ‘McCreevy reliefs’) over the four year period of the plan. The main schemes affected by this are: Urban Renewal; Town Renewal; Accelerated Capital Allowances for Hotels; Capital Allowances for Holiday Cottages; Student Accommodation; Multi-Storey Car Parks; Third-level Educational Buildings; Sports Injuries Clinics; Park and Ride Facilities, and General Rental Refurbishment Schemes. In general the opposition parties support these moves (although they differ in how they want the abolitions phased) so they are certain to be implemented. Sinn Fein has suggested an immediate capping of relief at the lower rate of income tax.
Sinn Fein has suggested abolishing the amount of interest that can be offset against rental income for tax purposes while the Labour Party is also suggesting reduction to 25% in the amount that can be offset.
Income tax relief for rent paid for private rented accommodation will go on a phased basis over the next eight years, in line with the time frame for the abolition of Mortgage Interest Relief. Last year the Government paid out €44 million on this relief. Again this is a move which has cross-party support, so there will be no wriggle room.
In its planned budget Fine Gael is suggesting making a pre-announcement that home insulation and other residential and commercial energy saving subsidies will terminate in 2013, leading to a bringing forward of demand in the intervening two years. The Government, however, has introduced a new tax incentive for works that improve energy efficiency instead.
Sinn Fein has suggested going a step further in relation to property by saying it would introduce an income-linked wealth tax of 1% on all assets, including property, in excess of €1 million, excluding working farmland, regardless of residency which it claims would raise €1 billion in tax revenue.
Check to see if you are eligible to qualify for the fixed €100 Site Value Tax when it is introduced.
Given that home loans taken out on or after 1 January, 2013 will no longer qualify for mortgage interest relief there is a period of two years during which those intending to purchase a house can maximise their tax relief on mortgages, although any potential saving would have to be offset against potential falls in overall property prices.
The cost of having an additional home going into the future needs to be considered carefully as the introduction of a site tax and proposed increases in taxation on second homes as well as increased VAT rates on some management company charges will place a taxation charge of at least €500 on most second/holiday homes and other additional properties.
If you are living in a house that is larger than you need over the medium-long term the abolition of stamp duty on down sizing, coupled with the new Site Value Tax, may make a move to a smaller property worthwhile.
Although rent relief is set to go you can still claim it for up to four previous years. The maximum relief for a single person aged under 55 was €400 and it was €800 for a married couple/widower aged under 55. These amounts doubled if you were aged over 55 in the past.
Service charges such as bin/waste charges paid to private operators such as Oxygen and Panda - up to 400 Euros - can be claimed for the past four years also.
The rent-a-room relief remains in place. This exempts household income from renting a room and providing meals, usually to students, by up to €10,000 per annum and can be claimed back for up to four years.
Water Charges
Household water charges will not be levied in 2011 as was widely expected.
The National Recovery Plan hinted that they may not be imposed until 2014 following the introduction of a nationwide meter installation programme. Up to 1.8 million households will need to have meters installed if these charges are to be based on actual consumption and a working group is already looking at how this might be achieved. The National Roads Authority may be involved in this infrastructure project.
Who will pay for the meters (our guess is: consumers) will probably be a matter of extensive debate on the Joe Duffy show over the next couple of years as some estimates put the cost of installation at circa €500 million or €50 per household.
Check your ‘site’ for any leaks or damage and have these repaired while plumbing costs are low. A dripping tap might add up to 50 per cent more and a cracked pipe may lead to several thousand percent increases in consumption.
Install water butts to capture rainwater from the roof and downpipes – this ‘grey’ water can be used for external purposes e.g. watering the garden, washing the car.
Consider if grey water from washing machines, baths, etc. can be recycled e.g. used to flush toilets. You will need to have such as system installed by a registered contractor.
Planes, Trains and Cars
The influence of the Green Party has been felt in fiscal matters during recent budgets and not just in relation to water. Among the changes that have occurred in recent budgets are increased charges on fuel, the introduction of a Carbon Tax and changes to VRT and Motor Tax which are now linked to CO2 emissions, as well as tax-related incentives for reducing energy consumption and insulating homes and businesses.
A carbon tax of €15 per tonne of CO2 emitted was introduced in the 2010 Budget and the National Recovery Plan proposes to double this tax by 2014, with a €10 per tonne increase in 2012, and a further €5 per tonne increase in 2014 giving a cost per tonne in 2014 of €30.
Interestingly both Fine Gael and Labour have both said that, if elected, they would reduce the increase proposed in the four year plan by €5 per tonne i.e. to €25. This might prove contentious if they had to form a coalition with the Green Party.
In real terms the planned charge increase will give rise to a 4 cent movement in price on a litre of petrol and 4.5 cent on a litre of auto diesel by 2014. The National Recovery Plan also outlines the likelihood that further changes in VRT and Motor Tax will be linked to CO2 emissions too. Recently, for example, it was announced that the ‘off-the-road’ vehicle tax exemption is to be scrapped. Transport Minister Noel Dempsey claimed that the exemption, which allows vehicle owners to avoid back tax on a vehicle if they can sign a declaration in a Garda station that it has been off the road since it was last taxed, is costing the State up to €75m per year. Mr Dempsey claimed there was “significant evidence” that some owners are fradulently declaring their vehicle was off the road when it wasn’t.
There have been increases in VRT relief on electrical and hybrid vehicles but an increase in the VRT flat rate for commercial vehicles from €50 to €200.
The car scrappage scheme will be extended for another six months.
Consider making a switch in office and home heating and energy to alternatives such as wind, solar or thermal power, particularly if you are based in a rural area.
Consider replacing existing cars and vans with lower emissions vehicles when they are due for replacement.
The type of fuel used by vehicles is important and consideration should be given to switching to lower CO2 fuels – diesel and LPG may give lower tax per kilometre, and alternatives such as biofuels may be worthwhile if you have a significant number of vehicles.
Ensure the full range of travel expenses are being claimed by employees.
Increase use of public transport in place of own-vehicles.
Purchase of annual public transport commuter tickets (these need to be purchased this month in order to obtain the full benefit).
Avail of the cycle-to-work scheme to purchase bikes and cycling clothing and equipment.
If your business is located in the centre of Dublin encourage the use of city bikes.
CAT and CGT
In recent years, the rates for Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT) were increased from 20% to 25%. The National Recovery Plan provides for a broadening of the base of CGT and CAT. There seems little agreement among the political parties as to how reform of CGT and CAT should occur and it is likely that this issue will be kicked into the latter part of 2011 or even 2012.
Fianna Fáil has said that in 2012, the single rate of CGT will be changed to a system of different rates of CGT for different levels of gains. Labour has suggested a structure where the first €50,000 would be paid at 25%; the next €50,000 at 30%; and the balance at 35%. Fine Gael has said that in relation to properties it would prefer to have a low (5-10%) rate of Capital Gains Tax on the site values of primary residences rather than an annual recurring property tax. The Labour Party has suggested limiting GCT for businesses to €3 million. Sinn Fein is suggesting an immediate increase in CGT to 35%.
A similar system to that proposed for CGT would be introduced by Fianna Fáil and the Green Party for CAT where the current tax-free thresholds will be reduced. Opposition parties have suggested a cut in Capital Acquisitions Tax thresholds (Fine Gael by ‘at least 20%’ and Labour by 25%); and an increase in the rate (Fine Gael suggest from 25% to at least 30% while Labour has said the structure it would like to apply would be the first €50,000 over threshold at 25%, the next €25,000 at 30% and the balance at 35%). Labour also proposes capping CAT for businesses to €3 billion and for farmers to 75%.
The National Recovery Plan also provides for the abolition or restriction of CGT, CAT and stamp duty reliefs and exemptions. However, Fine Gael has suggested that in relation to properties the 7% and 9% rates of stamp duty for families trading up and down should be reduced to 2% for at least two years to stimulate transactions in the property market.
DIRT
The Government has increased DIRT by 2% to 27% and 30% on long-term deposit accounts. Fine Gael, Sinn Fein and Labour all propose to increase DIRT to 30% in order to encourage higher levels of household consumption in 2011.
Minimum Wage
One of the most significant changes proposed in the National Recovery Plan in 2011 is that the minimum wage will be reduced by €1.00 to €7.65 per hour. The change is expected to come into force in May 2011 if the current Government is still in power and it is a requisite for reporting to the IMF and ECB if Ireland is to continue to draw on their funding. Opposition parties have attacked this element of the four year plan strongly and this change may not be implemented next year if the situation can be renegotiated with the fund holders. Today the Minister announced that those on the minimum wage would not come into the tax net.
Over the coming years other employment agreements which are linked to the minimum wage will be reviewed which could see a reduction in overtime and special pay rates for working at weekends and on public holidays.
Employers will now be able to claim the ‘inability to pay’ exemption clause in respect of the minimum wage more than once, lifting a previous one-time cap on such claims.
Artist’s Exemption
Artist’s exemption from income tax will be restricted to €40,000 in earnings. This can apply to books, plays, musical compositions, paintings or pictures, or a sculpture.
Although the exemption threshold has been lowered it may be worthwhile considering if any of the work that you do might qualify for the exemption. In recent years the Revenue Commissioners have been more flexible in their interpretation of what constitutes art.
Education Fees
The Government has announced an increase in registration fees for third level students to €2,000 for a first member of the family, and €1,500 for subsequent members.
The Labour party has suggested a new scheme where a person would be entitled to claim back their income tax from their last two years of work in order to offset their loss of income while undertaking full-time study in an authorised institution. This scheme would initially be limited to 2,000 applicants, on a first come-first served basis. Only annual income up €50,000 would be eligible for a tax refund.
Labour is also opposed to the proposed charge for Post-Leaving Certificate (PLC) courses.
Other Reliefs
Last year, Revenue paid back €102m on medical expenses alone and the political parties appear to be trying to outdo each other in their rush to get rid of tax reliefs. What seems certain at this stage is that income tax relief for trade union subscriptions will go; employees in many former state agencies which were privatised (such as Eircom and Aer Lingus), financial institutions and other organisations will see tax exemption on Approved Share Options lost in 2011; and benefit-in-kind exemption on employer provided childcare will also go in 2011, adding substantially to the cost of availing of childcare at workplace crèches and playschools.
Other reliefs that may fall under the axe (depending on which parties are in power this time next year) include relief for patent royalties; tax relief on loans to certain companies; relief on share purchases by employees, etc.
Although some reliefs are going others remain in place. Many people fail to claim each year and it is possible to claim for up to four years ‘in arrears’ for many reliefs. Reliefs to consider include: Medical expenses (which can include GP visits, doctors’ bills, hospital treatments, x-rays, ambulance transportation, maternity care, prescription medicines, physiotherapy, laser eye surgery, treatment of other eye problems, food and drink for coeliacs, and more); dental expenses (for procedures such as veneers/crowns and root canal treatment). Trade union subscriptions of up to €70 per year. Again this used to be at 20% and can be claimed back over the previous four years. Qualifying tuition fees (up to 5,000 Euro per year, with relief available at the standard rate); Flat-rate expenses depending on your profession. Childcare services in the home. Although the income from this is relatively low (average ‘pay per hour’ is just over five Euro according to the recent ‘Growing Up in Ireland’ report) childcare services provided up to a value of €15,000 are exempt from income tax. This may make additional sense as the relief on providing childcare facilities in the workplace is to be lost over the next few years.
Pensions
Existing pensioners face little change over the next 12 months as no changes are expected in the State Pension in 2011 although the four-year, National Recovery Plan does not preclude such changes in future years. The plan reiterates a decision to increase the qualifying age to 66 in 2014 and to up to 68 by 2028.
Existing public service pensioners, however, will face cuts for the first time, with an average reduction of four per cent in their pensions for those earning more than €12,000 per year. Public service lump sums will also be subject to a deduction.
For those currently working and saving for a pension there are some significant changes in the pipeline. The rate of tax at which the pension contribution qualifies for tax relief is currently the marginal tax rate. Relief will continue to be available at this marginal rate for 2011 but it will reduce to 34% in 2012, 27% in 2013, and from 2014 the tax rate will be the standard rate of tax of 20. Should Fine Gael be in power after the next election they propose a further change by cutting tax relief on schemes offering pensions greater than €60,000. Labour has similar proposals in mind, but has not yet specified the amount of the cap.
The relief offered on both PRSI and the health levy will be scrapped for pensioners in 2011.
A number of steps are being taken to reduce the tax advantages of having a large pension. These are aimed particularly at company directors and business owners who have used pension savings as tax shelters and have amassed large personal pension funds running to several million Euro.
The ceiling for a tax deduction for pension contributions is being reduced from €150,000 to €115,000 in 2011. This will further reduce the level of tax deductible contributions that an individual can make to fund his/her pension. There is also a proposal to reduce the maximum value of funds which an individual can have in a pension scheme. This currently stands at €5.4m but it is likely to be considerably reduced – Fine Gael has nominally suggested a maximum of €1.5 million for private sector workers but Labour has simply suggested ‘a cap’. All ex-gratia termination and pension lump sum payments in excess of €200,000 are also to be taxed according to the National Recovery Plan (although Fine Gael has suggested a higher limit of €250,000).
An alternative the Government’s plans has been proposed by Fine Gael which says it will make tax savings of a similar scale through a combination of a temporary, annual 0.5% contribution for all private pension funds with an equivalent reduction applied to public and private sector defined benefit entitlements; abolition of PRSI relief on employer pension contributions; and PRSI/health levy relief on employee pension contributions.
Fine Gael has also proposed to increase the "deemed distribution" rate on large (Annual Retirement Funds ARFs) to avoid their use for inheritance tax planning; and applying from 2012 marginal rates of income tax, rather than Capital Acquisitions Tax, to ARFs on the death of the beneficiary to avoid their use for inheritance tax planning. This could be accompanied by a one year window in 2011 for beneficiaries to accelerate withdrawals from ARFs at a tax rate of 35%, leading to a windfall for the exchequer at a crucial time.
If you are in a position to accelerate your pension payments into 2011 in order to maximise the tax relief available.
With more and more pension payment being brought into the tax net it might be worth considering if alternative forms of investment might yield a better return in the long run e.g. investments in natural resources, commodity trading, property, classic cars, wine, etc.
Social Welfare Reforms and Payments
Social welfare expenditure will be €3 billion lower in 2014 compared to spending for 2010 (the Department's Budget for 2010 is €20.9 billion). Scheme savings within this Department will be required amounting to €760 million in addition to savings of €100 million from labour activation measures in 2011. Three reports on structural reform were released on the same day as the National Recovery Plan which will assist with key areas of structural reform of the social welfare system. The reports are accessible on www.welfare.ie'. Savings in social welfare expenditure will be achieved through a crack down on welfare fraud, structural reform and new employment programmes to cut the number of people on the dole. The crackdown on fraud will be aided by the roll out of a new public services card next year for welfare recipients and increased use of new technology, such as automatic telephone contact with those on job-seekers’ allowances, may be moved forward.
For Budget 2011 the expectation was that there would be an average 5% reduction in welfare payments as many consumer costs have reduced in recent years. The Minister for Finance announced the establishment of a National Welfare Index by the CSO to help decision making in this area.
Child Benefit is to be reduced by €10 for the first child, and €20 for third and subsequent children.
The fuel allowance is to be increased by €40 this year to counteract the effects of cold weather.
Fine Gael has suggested reducing social welfare payments for those ‘with the capacity to work’, beginning with a €6 weekly cut in 2011 and rising to €18 by 2014. Working age payments to carers, the blind and the disabled would be maintained at current levels.
Existing funding relief for pensioners, in areas such as the TV licence fee and free travel schemes, will eventually be frozen at 2010 levels.
Citizens over 65 will also have to pay for passports from 2011 (the current charge is €80).
Fine Gael has suggested cutting the rate at which Rent Supplement is paid by 10% and the length of time that it is paid to six months. After six months, families with housing requirements will be transferred to local authority Rental Accommodation Schemes.
A final thought
The National Recovery Plan contains over 140 pages of aspirations for the next four years, replaces the old system of well-timed leaks to test public opinion and brings some certainty and stability to the budgetary announcement process. There were few surprises in this year’s Budget announcement but the Government may find it difficult to pass all of their proposals through the Dáil in the coming days and weeks. With the prospect of a general election in the first quarter of 2011 making many sitting TD’s look over their shoulders some have already said they will not back the Budget proposals.
There is already wide disagreement among the political parties about the size of the savings needed – ranging from six billion from Fianna Fáil, the Green Party and Fine Gael, through 4.7 billion from Sinn Fein and 4.5 billion from the Labour Party, to zero among some independents! Smaller parties may hold the balance of power in the coming general election, so their proposals must be seen as ‘waiting in the wings’.
In the meantime, as Senator Shane Ross is fond of saying: “Who’s going to pay for it all? The tax-payer, that’s who – you and me”!
C: Sue Mulhall, M. Ed., BBS, Dip. PM., MCIPD
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