Respite from higher rates only temporary

Tax bandsClose to 20,000 more people could be paying tax at the higher 42 per cent rate next year, despite the changes in tax bands and credits. The Minister for Finance, Mr Cowen, said the new measures would take 52,100 taxpayers out of the 42 per cent tax band, but official estimates drawn up by his Department suggest that this will be just one side of the story.

Mr Cowen's goal in changing rates and bands was partially to reverse trends set over the previous two budgets which led to more workers being pushed from the standard into the higher band as their wages increased. This happened because rates and credits were not indexed to inflation by Mr Cowen's predecessor, Mr McCreevy, in 2003 or 2004.

In the end, the 4 per cent increase in credits and 5 per cent hike in bands are enough to recover just about half of this "fiscal drag", while wage increases due over the course of 2005 will limit the positive effects of the shifts even more. This means that even though Mr Cowen's 52,100 workers may in fact be taken out of the higher band, their removal will probably only be temporary.

Figures released yesterday show that if Mr Cowen had done nothing to tax credits or bands yesterday, 685,848 workers would have been paying tax on some of their income at 42 per cent in 2005. This would have represented 35.9 per cent of the working public. As a result of the budgetary measures, however, the actual number of workers on the higher rate will be about 633,740, or 33.2 per cent of workers.

What these calculations (see accompanying table) do not reveal is that even after the measures are introduced, the proportion and number of people paying 42 per cent on a portion of their income will grow as their wages increase.

Rough estimates released by the Department of Finance before the Budget show that some 614,000, or 32.6 per cent of workers, were paying tax at the higher rate this year. Yesterday's calculations suggest that this will rise by about 19,000 to 633,740 next year. In 2003, this estimated total was 555,000, or 29.8 per cent.

This Budget is likely to result in more people paying tax at the higher rate than at any time before.

These estimates, which the Department of Finance warns are tentative and likely to be revised, include provisions for pay increases in 2005. Most workers can expect to see their pay packets swell next year as a result of the national pay agreement.