The process of individualisation of the tax system began in 2000 but how has it affected the tax payers, asks Anne Bolster

In his 2000 budget speech, the Minister for Finance expressed his concern at the low level of income at which single people became liable to pay tax at the top rate. One of the difficulties the Minister identified was that married couples were able to avail of a standard rate band that was double that available to a single person.

To deal with this, the Minister proposed making a radical change to the tax system by moving to individualisation of the standard rate band commencing in the 2000 budget and to be completed over the following two budgets.

The aim of individualisation was to ensure that each individual had his or her own standard rate band and that the standard rate bands would not be transferable between spouses.

Supporters of individualisation view this as a pro-work/pro-employment initiative. Critics insist that, because individualisation also benefits married couples where, for example, one of the spouses has investment income, it cannot be viewed as pro-work.

In response to the initial opposition to his proposal to introduce individualisation, the Minister introduced the home carer tax credit. This tax credit is available to a married couple who are assessed jointly, where the home carer stays at home to care for a child or dependant and the carer's income is less than the relevant limit for the year (€5,080 for 2002). A married couple may not avail of both the home carer tax credit and the increased standard rate band available to dual-income couples. However, they may claim whichever is more beneficial.

Who has benefited from individualisation?

Over the three budgets from 2000 to 2002, the standard rate band for a single person has increased from €21,585 to €28,000, an increase of 30 per cent, with the standard rate band available to a dual-income married couple also increasing by 30 per cent to €56,000.

For the married couple with one income, the standard rate band has increased over the same period by €1,448 or 4 per cent to €37,000.

A single person earning €25,000 has seen tax as a percentage of income drop from approximately 19 per cent to 11 per cent over the three years. Likewise, an individual earning €40,000 has seen a drop from 28 per cent to 21 per cent in the same period.

Dual-income married couples have also benefited to the same extent as the single person. However, one-income married couples have not enjoyed the same benefits as a result of individualisation.

In 2002, a one-income married couple will suffer tax as a percentage of earnings at 18 per cent on income of €50,000 compared to a two-income married couple, where each earn €25,000, who will suffer tax as a percentage of earnings at 11 per cent. If the one-income married couple qualify for the home carer credit, this rate is reduced to 17 per cent, still 6 per cent higher than the two-income couple.

So how exactly has individualisation impacted on the income tax liability of married couples?

This depends on the level of the total income of the married couple and, more importantly, how that income is split between both parties. If the total income of the married couple is less than €37,000 in 2002, then individualisation has no impact.

To get the maximum benefit from the standard rate band available to a married couple in 2002, it is necessary for the lower earner to be in receipt of income of at least €19,000 per annum.

The impact of individualisation is illustrated by the following example:

George and Mary are married. In 2002 George earns €29,000 and Mary receives rental income of €29,000. Their joint tax liability for 2002 is €8,340.00 (tax as a percentage of income is 14.38 per cent).

Michael and Jean are also married with one source of income in 2002 of €58,000. Their joint tax liability for 2002 is €12,520 (tax as a percentage of income is 21.59 per cent). If Michael and Jean qualify for the home carer tax credit, their liability will be reduced to €11,750, which means that tax as a percentage of income is 20.26 per cent.

The tax bill for Michael and Jean is higher by €4,180 (€19,000 at 22 per cent) due to the fact that they cannot avail of the higher rate band available to a dual-income married couple. As a result, €21,000 (€58,000 - €37,000) of their income is liable to tax at 42 per cent whereas the other couple's total income remains liable to tax at 20 per cent.

The table below also demonstrates the impact of individualisation across a range of incomes.

In his 2002 budget, Mr McCreevy stopped short of the final step towards individualisation and, therefore, the question remains as to whether he will take this final step on December 4th. The European Commission has also encouraged the Government to continue its policy of individualisation to increase the participation of women in the workforce. One would suspect that in these difficult times the Minister is unlikely to introduce total individualisation, which would require the equalisation of the standard rate bands for a single person and a single-income married person. This would require an increase in the standard rate band available to a single person from €28,000 to €37,000.

However, it will be interesting to see what change, if any, is made to the standard rate band for a single person and whether the standard rate band available to a one-income married couple remains static.

Anne Bolster is a senior manager with the HR solutions group in PricewaterhouseCoopers.