The billion-euro giveaway: What to expect in budget 2017

It has been touted as the budget that could bring down a government, with the Government’s plan to move towards scrapping the universal social charge (USC) a potential catalyst for a stalemate.

Some tax experts are now wondering if we will see a budget on October 11th at all, or whether protracted negotiations might delay it until a later date – or until a new government takes office. And if a budget emerges on schedule,some fear it may be disjointed, as each faction within the Government vies for its own interests.

This is despite the fact that the Government may have about €1 billion to play with – the largest sum since those heady, pre-austerity days. The Government has committed about €600 million to spending increases, with a further €300 million earmarked for tax savings.

So if Minister for Finance Michael Noonan manages to secure agreement, what might we see in a month's time?

Well, austerity may now be in the rear-view window, but it’s not yet out of view. It has been estimated that the average taxpayer is still paying about €2,500 more a year in taxes than before the crisis, while middle- and higher-income earners are losing even more of their take-home income. So cash-strapped employees will be hoping for some relief come budget day.

The programme for government has committed to phasing out the much-maligned USC as part of a medium-term strategy. The problem facing the Government, of course, is that USC is such an effective tax generator, bringing in an extra €4 billion a year. So while it might be keen to cut the charge, it can't go too far.

"Next to water charges, it has to be the most unpopular tax we've had: we probably associate it with austerity, and it's emotional as much as the actual cost of it," says Anne Bolster, a tax director with PricewaterhouseCoopers (PwC). "What's very clear is they want to reduce USC but they want to make sure that people earning over €70,000 don't really benefit."

With an emphasis on "low and middle" earners, it is likely that the biggest cuts will apply to those earning up to €70,000, while gains will likely be clawed back from higher earners in the form of a tapered PAYE credit, KPMG tax partner Olivia Lynch says.

As Noonan has said: “We want everyone on an income to gain from this. But we want the gains to be proportionate.”

So what will he do?

One option would be look at the threshold of €13,000. Below this you currently don’t pay any USC, but go over it by even a small amount and you pay USC on all your income. As Lynch notes, this threshold is “very low” and there is scope for this to be moved to a higher figure.

Another option would be to reduce the number paying the 3 per cent rate, by widening the band, or simply by reducing the rates, as has been done in previous years. Whatever option is finally chosen – or agreed upon – one thing is certain, says Bolster: “You won’t see a big boost come January.”

Figures show that if the main rate of USC is cut by about one percentage point, it would increase the wages of someone earning €38,000 by little more than €3 a week.

"You can't forget those who create employment," Lynch notes, adding that the Government should be mindful of the tax burden for the self-employed as well.

This means the 3 per cent surcharge on incomes of more than €100,000 may be set to go. It's understood that about 28,700 people pay the three percentage point surcharge. On an income of €120,000, for example, figures from the Irish Tax Institute show a PAYE worker would pay tax of €49,882, some €1,700 less than a self-employed person.

Introduced last year as part of efforts to level the playing field for those working for themselves and those in the PAYE sector (who are entitled to a €1,650 PAYE credit), the “earned income tax credit” allows the self-employed to cut their tax bill on “earned income” – ie not rental or investment income.

Described by Noonan in last year’s budget speech as a “first step”, it’s set to rise to €1,650 by 2018, which means a doubling of the credit to €1,100 is likely in this year’s budget.

However, if the Government does that, there is a presumption that it will taper the credit in line with the PAYE tax credit. It’s also expected that the PRSI benefits PAYE workers enjoy will be broadened to include the self-employed.

“It’s a welcome measure,” says Lynch.

While the self-employed, who pay PRSI at a rate of 4 per cent on their income, are entitled to the State pension, maternity benefit and jobseeker’s allowance, they cannot claim jobseeker’s benefit or sick pay. The self-employed may be expected to up their PRSI contributions to pay for these additional benefits.

The tax we pay on any interest earned on savings and investment funds has rocketed in recent years, up by a fifth from just 33 per cent in 2014 to 41 per cent today. So could it be time for the tax to go the other way?

Up to budget 2009, the rate of Dirt was equal to the standard rate of income tax at 20 per cent, but the rates have diverged significantly since, as the Government has sought to generate extra revenues and to encourage spending in the economy to stimulate growth and employment.

While exemptions apply for the over-65s with income below a certain threshold, some people will find that they must also pay PRSI on top of Dirt, pushing their total liability up to 45 per cent.

But the measure has not delivered for the Exchequer. In 2011, the Government collected €473 million in tax on savings; by 2015 this had slumped to €301 million, according to figures from the Tax Strategy Group, as returns offered on deposit accounts plummeted.

With yields falling, the group suggests we may have reached "a point of diminishing returns" and suggests the Dirt rate should fall to match the higher rate of income tax (40 per cent) or the current rates of capital gains tax (33 per cent) and capital acquisitions tax (33 per cent). A one percentage point reduction would cost the Exchequer about €7.3 million, while cutting it to 33 per cent would cost €58.4 million in a year.

“I don’t think it will encourage investment at a time when interest rates are so low,” says Lynch.

It's been broadly signalled that some form of incentive is on the way for beleaguered first-time buyers, with Minister for Housing Simon Coveney indicating during the summer that it will likely be announced on budget day – although it is being prepared in conjunction with the Central Bank and its mortgage lending rules, so agreement will need to be reached on this.

What we know so far about the scheme is that it will be backdated to July 19th; it will likely be restricted to new builds up to a certain value; it could be worth up to €10,000 per couple; and it’s likely to be given in a “rebate” type format.

It’s possible that the rebate will be given at source, which means that no one will have a €10,000 cheque to buy their new furniture with.

“They might spread it out month to month, which would lessen the impact on house prices,” notes Bolster.

Changes for existing homeowners, in the form of an enhanced mortgage interest relief scheme, are also likely.

Homebuyers who bought between 2004 and 2012 are currently entitled to relief on the interest they pay on their mortgages of 15-30 per cent, with the higher figure pertaining to first-time buyers for the years between 2012 and 2017. However, this is due to end in December 2017, and Lynch suggests that there could be scope for the Government to address this “cliff” on budget day.

The Department of Finance’s pre-budget document gives three options:

- current regime tapered out to 2020;

- taper ceiling on allowable interest;

- focus tapered extension of mortgage interest relief on those who bought between 2004 and 2008.

With many homeowners in this period overburdened with excessive mortgages and some still in negative equity, the last may make sense as, Lynch notes, “it’s the audience that needs most support”.

It’s been the subject of much attention in recent times and, if you were a betting person, you’d have to expect some change to the current regime. Although the parent-child category A threshold was made more generous last year, rising by 24 per cent to €280,000, there has been talk of increasing this to €500,000. Another option would be to increase the threshold for passing on the family home.

As stated in the programme for government, "we will work with the Oireachtas to raise the Band A Capital Acquisitions Tax threshold (including all gifts and inheritances from parents to their children) to €500,000". However this may not all happen this year.

“It won’t be done in one lump,” says Bolster. “It will happen over the lifetime of the Government”.

While the thresholds might increase, however, Lynch doesn’t foresee a change in the rate of capital acquisitions tax (CAT), currently at 33 per cent,

“I can’t see them changing CAT; it’s high but in my view it is progressive,” she says, but she would like a change in all thresholds, and not just parent/child.

“The make-up of families is changing, and who is inheriting assets is changing. I would encourage them to look at all the thresholds, and not just parent to child,” she says.

Last year’s budget made it easier for a stay-at-home parent or carer to work a certain number of hours without affecting their home carer tax credit, worth €1,000, up from €810 previously. The credit can be claimed in circumstances where the stay-at-home partner, who is caring for a dependent person such as a child or elderly relative, doesn’t earn more than €7,200 in one year.

Now another hike is likely to be on the way.

“As the economy begins to approach full employment, this may be effective as a workplace activation measure for second earners, allowing the second earner to work additional hours while retaining some or all of the benefit of the HCC home carer credit],” the Government said in its income tax reform plan.

Lynch suggests the credit could rise to €1,200, which would allow the stay-at-home partner earn up to €8,640 a year, without affecting their ability to claim the credit.

However, a further hike in the eligible income won’t benefit everyone claiming the credit. According to Bolster, if the primary earner in the family is earning €42,800 or more, the home carer credit is only better than the increase in the standard rate allowance if the lower earner is earning less than €5,000.

Other possibilities

- Increase minimum wage: Earlier this year the Low Pay Commission recommended a 10 cent increase in the national minimum wage to €9.25 an hour. If this new rate is approved in the budget, someone working 39 hours a week would see their income rise by €3.91 a week, up to €360.75.

- Enhance share scheme structures: Lynch would like to see something done on rewarding talent, as incentivising employees in the form of shares can be quite penal at present.

- Extend the home renovation incentive scheme: First introduced in 2013, the scheme allows those carrying out repairs on their homes to claim back VAT at a rate of 13.5 per cent, up to a value of €30,000. It’s due to run out at the end of this year, but Bolster suggests that it could be extended. After all it’s been a success on two fronts. By the end of 2015, Revenue figures show that some 35,722 properties had availed of the relief at a value of €810 million. And more than contractors are registered in the scheme – meaning that they are all tax-compliant.