Boost for all income tax payers as bands and credits rise

Pressure to index income tax reliefs and credits in line with inflation came to naught in Budget 2022 but the Minister did announce a widening of income tax bands and increases in credits that will boost take-home pay for many workers.

The standard rate income tax band will be increased by €1,500. This means that anyone earning up to €36,800 will pay tax at the basic 20 per cent rate.

Married couples or civil partners with one earner will not enter the higher 40 per cent tax bracket until their income tops €45,800.

"As prices rise and inflation returns, the Government wants to ease the cost of living pressure which many are feeling," said Minister for Finance Paschal Donohoe. "These changes will benefit everyone who pays income tax."

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"For higher rate taxpayers, the additional net income is nearly €35 per month or €415 per annum," said EY tax partner Michael Rooney.

That figure also includes the impact of increases in personal tax credits announced by Donohoe and changes in the universal social charge (USC) regime.

There will be a €50 increase in the annual personal tax credit. The same amount will be added to the employee tax credit and earned income tax credit – which between them cover PAYE workers and self-employed people. This will bring each of the credits up to €1,700 per annum , from €1,650 previously.

On USC, the Minister widened the 2 per cent band so that it applies from income of €12,013 to €21,295 from the start of 2022 – from €20,687 previously. The change was made to ensure that people on the national minimum wage, which will rise by 30 cent an hour to €10.50 will not find themselves paying USC at the higher rate of 4.5 per cent.

Wage supports

The American Chamber of Commerce Ireland, which represents US multinationals here, welcomed the decision to increase income tax bands and tax credits, noting that among its members, “93 per cent call out personal tax as a barrier to attracting/retaining talent, with 40 per cent seeing it as a barrier to further investment and expansion”.

The Government collected €22.6 billion from income tax last year, just 1.3 per cent down on the 2019 figure even though 664,000 people – or about a25 per cent of the workforce – were on Government wage supports at one stage during 2020, said accountants EY.

“The importance and resilience of the income tax system is clear, but our economic rebound, and the inflationary pressures that brings, meant that the Minister had to raise the tax and USC bands and increase tax credits, so that all taxpayers could feel like they had a little bit more net income in their pocket,” said EU tax partner Michael Rooney.

The income tax measures are likely to cost €520 million next year and €597 million in a full tax year. The changes to USC bands will cost the exchequer an additional €22 million in 2022 and €26 million in a full year.

"Time will tell if Ireland can avoid the tax increases that many other economies are having to apply to repair their finances," said Neil Gibson, chief economist, at EY Ireland.

Irish Tax Institute president Karen Frawley noted that, before this year’s budget, the personal tax credits had remained unchanged since 2011 when they had been reduced from €1,830 to €1,650.

“Our effective personal tax rates at average salaries and above are high by international standards and have changed very little since the tax increases introduced during the financial crisis over a decade ago,” according to Ms Frawley.

“Irish workers on average salaries pay more income tax than their counterparts in France, Germany, the UK or Sweden. High marginal rates make it difficult to attract skilled workers, particularly when the labour market is tight,” added Ms Frawley.

She said the changes to bands and rates announced by the Minister were a welcome start. “But if we are to remain an attractive location for investment, a more comprehensive review of our personal tax system will be required.