Budget 2023 - Personal Tax

Budget 2023 is very much being pitched by the Government as a cost of living Budget. There is no sector of society that is immune from the effects of the cost of living crisis and the spiralling inflation. For many years taxpayers have become accustomed to low inflation and low interest rates. Those days are gone. With rising inflation real wealth is being eroded. This is leading to wage increases, which in turn fuels increases in prices as businesses need to increase prices to pay additional staff overheads. It’s a vicious circle.

The Irish Times reported on Wednesday that the cost of living package could exceed €2bn. It is vitally important that these spending initiatives are targeted at the most vulnerable in society. There is a real concern over fuel poverty as we face into a difficult winter. The Government will also be looking over its shoulders at our EU and UK neighbours to ensure they get the pitch right.

Notwithstanding the cost of living crisis the Department of Finance’s Annual taxation report clearly shows that the State’s two largest revenue streams are concentrated around a small number of employees and companies. This is a real cause for concern. There is too much reliance within the State on certain categories of taxpayers, which leaves the State exposed, in particular to jobs related to foreign direct investment. It is critically important that the income tax system is not a deterrent for businesses looking to invest. Banging the 12.5% rate of corporate tax drum is not enough in the competition for investment. The income tax system is also of critical importance, especially if the State wishes to attract talent. The Department of Finance’s Annual report shows that the distribution of tax liabilities in Ireland is “markedly skewed towards higher wage earners” with the top 25 per cent of earners paying approximately 80 per cent of income tax”. The Irish tax system is one of the most progressive in the EU. However, this does impose a high tax burden on certain taxpayers.

We consider a number of these factors below and how the Government can address these in the Budget.

Tax Bands

For many of those who may be in line for a pay increase, they may be in for a surprise when they feel the pinch of additional tax on that income. The income tax paid is a function of tax bands, tax rates and tax credits/reliefs. The current standard income tax band is €36,800. Whilst it has increased from €35,300 it has hardly kept up with wage increases. The Government committed in Budget 2022 that they will index bands and credits “in the event that incomes are again rising”. With inflation currently at 9% we can expect to see an increase in bands and credits. The real question is by how much? A significant increase is merited in this Budget.

Review of income tax system

As regards the rate of income tax, Tánaiste Leo Varadkar suggested recently that an intermediate tax band of 30% could be considered. However, it is unlikely, that this rate will be introduced in this budget. A new rate would require an overhaul of the existing income tax system and is probably too late for 2023. It is however to be welcomed that the Tánaiste has mooted changes to the income tax system. We would go further and recommend that a fundamental review of the income tax system be undertaken. The reality is that the Irish income tax system is overly complicated and clearly panders to “soundbites”. We often get asked by foreign business considering setting up in Ireland as to what the rate of income tax is in Ireland. Not a simple answer. Whilst the headline top rate of income tax is currently stated to be 40%, this blatantly ignores the impact of USC and PRSI. The real top rate of tax on income (income tax, PRSI, USC) in Ireland can be 55% - a far cry from the 40% headline rate.

Whilst some may say that PRSI is not a tax per se. this is generally on the assumption that PRSI contributions provide certain benefits. This ignores the fact that not all PRSI contributions are equal. PRSI is chargeable at a rate of 4% on unearned income such as rental income. However, this PRSI does not entitle the taxpayer to social welfare benefits nor does it count towards credit for the old age pension. This is just income tax by another name. Likewise USC is just a tax. Each of these taxes has different bands and different rules for calculation. The system is unnecessarily complicated.

In our view it is time to overhaul the income tax system. Simplify the system aligning USC/income tax and PRSI and move to reduce the top effective rate of tax on income.

Self employed

The current system is penal to certain sectors that cannot incorporate or choose not to incorporate e.g. doctors/solicitors by applying a 3% USC surcharge to non-PAYE income in excess of €100,000. Whilst this applies to all non-PAYE income i.e. investment and self-employed income, it is clearly unfair that a self-employed individual is taxed at a higher marginal rate than a taxpayer who draws a salary (55%v 52%).

The Government has acknowledged that this is “unfair” and has committed to levelling the playing field. We do not see any justification for the difference in treatment. In particular certain professions can’t incorporate and therefore must provide services in a personal capacity. This additional 3% USC surcharge penalises them. There is no coherent reason as to why the income tax system should impose a surcharge on their self-employed income. This should be addressed.

Remote working

There has a lot of discussion recently around hybrid working and more specifically the allowance of expenses from a tax perspective. The Government policy has been to support flexible working and remote working. However this brings into issue the question as to what expenses employees are entitled to be reimbursed tax free or are available as a deduction against their income tax. Revenue practice in this area is very restrictive. At present Revenue guidance states that if an employee works part- time in the office and part-time at home the normal place of work is considered to be the office. This is relevant in the context of the reimbursement of travel expenses in the course of business – where is the place of work?

Another area is in the context of deducting expenses of a home office against employment income. Whilst Revenue practice is to allow 30% of certain expenses (electricity, light, heat and broadband) they do not at present allow a deduction for mortgage interest or rent of a home. This issue was the subject of a Tax Appeals commission case recently when a taxpayer working from home sought to deduct a portion of their rental income against their employment income. Revenue refused on the basis that the expenditure was not incurred “wholly, exclusively and necessarily” for the purposes of the employment. The Tax Appeals Commission upheld the Revenue’s argument.

The world of work is undergoing a seismic shift. Revenue practice is not keeping up with the reality of how work is undertaken. Rather than relying on Revenue practice (which is not law), in our view it would be preferable for the Government to legislate in this area, ensuring the tax system is aligned with current working practice. Many people are working from home and some businesses do not require a large office footprint in the centre of cities or towns. That is the reality and we would like to see this reflected in the legislation.

Contact us:

Should you with to discuss any aspect of the Personal Tax, please contact our Team:

  • Laura Melia, Tax Manager, +353 1 6440100
  • Ronan McGivern, Tax Partner, +353 1 6440100