Income Tax Reform Plan
The Programme for a Partnership Government (“PPG”) published an Income Tax Reform Plan (“The Plan”) on 21 July 2016. The purpose of the Income Tax Reform Plan is to review the current personal taxation system and to consider possible options for a future reform within the existing system.
Some of the key proposals in the Plan are as follows:
1. Mortgage Interest Relief
Mortgage Interest Relief is due to expire on 31 December 2017. It is proposed that the relief may be extended under various options up to 2020.
- One of three options mentioned is to phase out the relief over a period of time by reducing the rate of the relief to 75% of the current level in 2018, to 50% in 2019, to 25% in 2010 and nil thereafter.
- Another option is to phase out the relief by reducing the ceiling on allowable interest. Currently the ceiling for an individual is €3,000 (€6,000 for a couple).
- The final option considered is to continue the relief on a tapered basis for first time buyers who purchased property between 2004 and 2008 only and to reduce the relief to 75% of its current level in 2018, to 50% in 2019, to 25% in 2020 and Nil thereafter.
2. Universal Social Charge
The PPG has committed to phase out the USC and proposed three options in the Plan.
- The first option involves a gradual reduction in USC rates within the existing USC bands (generally by 0.5%).
|Existing Rate||Band Ceilings||Suggested Rate|
|1%||On first €12,012||0.5%|
|3%||€12,013 to €18,668||1.5%|
|5.5%||€18,669 to €70,044||2.25%|
|3% surcharge||On self-employed income over €100,000||1.5% surcharge|
- The second option proposes a gradual increase in the USC band ceilings and the phased abolition of the 3% surcharge for the self-employed.For example, by 2019, the 1% band would apply to incomes between €0 and €35,000, 3% band for incomes between €35,001 and €65,000 and the 5.5% band would apply to incomes between €65,001 and €100,100.
|USC Tax Rates||Suggested Ceiling|
|0 – €12,012||1%||0 – €35,000|
|€12,013 to €18,668||3%||€35,001 – €65,000|
|€18,669 to €70,044||5.5%||€65,001 – €100,100|
|Over €70,044||8%||Over €100,000|
|On self-employed income over €100,000||3% surcharge||To be abolished|
- The final option sets out an increase in the exemption threshold from €13,000 to €36,000, in which case USC would only be charged on income above €36,000.
3. Home Carer Credit
The home carer credit increased to €1,000 in Budget 2016. The Plan proposes to further increase the credit by amounts of between €100 and €250 in 2017.
4. Earned Income Credit
An Earned Income Tax Credit of €550 was introduced from 1 January 2016 for self-employed individuals and business owners who are not eligible for the PAYE tax credit. This is being introduced in order to address the current disparity in the take home pay of employees and self-employed individuals.
The maximum relief for 2016 is €550 and the plan proposes to increase this credit to €1,650 by 2018.
5. PAYE Tax Credit and Earned Income Credit
The Plan proposes tapering out both of these credits for “high earners” from 2018 at a rate of 5% per €1,000 of income. It is proposed that a “high earner” for this purpose would be an individual earning either €80,000 (with the credit fully tapering out at income of €100,000) or €100,000 (with the credit fully tapering out at an income of €120,000).
The proposals in the Plan should result in tax savings for most taxpayers which is to be welcomed and a good starting point.
However, it is most likely that, the marginal tax rate will exceed 50%. Our marginal rate of income tax and the entry point at which individuals pay tax at that rate, do not compare favourably on an international level. Therefore, further changes are required to the Irish personal tax system to make Ireland more competitive with other jurisdictions and encourage further foreign direct investment.