MORTGAGE holders and VHI members will find very little to console them in the recent Budget. Any tax savings from the widening of the PAYE tax bands or the new income exemptions from PRSI have been offset by the elimination of PRSI relief, the increase in the income ceiling for PRSI and by the continued reduction in both the mortgage and VHI relief.
The Budget changes mean that a married couple now has another £1,000 of income up to £18,800 taxed at the standard 27 per cent rate rather than at the 48 per cent rate. The savings is worth £210. For a single person the savings is worth £105. The PRSI changes mean that the first £50 of a weekly salary (£80 next year) is exempt from PRSI, a savings of £86 for the person earning £10,000, but less than £50 in the year for someone earning £40,000.
The loss of the £140 PRSI relief nearly wipes out these gains, but it is the impact of the decreased tax relief on mortgage interest which will have the most significant effect on middle and higher earners incomes this year. Anyone claiming up to the maximum allowable mortgage interest relief and relief from VHI will probably find themselves paying more tax in 1996/97.
It was the 1994 Budget which heralded the decline in mortgage and VHI tax reliefs. Back in 1993/94 the maximum allowable mortgage relief was deductible at 48 per cent and for a married couple with the maximum allowable interest of £3,800 the relief was worth £1,824. As the above table from the Taxation Advice Bureau shows, the effective tax relief that could be claimed dropped to 42.75 per cent in 1994/95 or about £200 less than could be claimed the previous year. Last year however, the same couple's tax relief - at 37.5 per cent - was worth £400 less than in 1993/94 and this year, at just 32.25 per cent will be down about £600 on the amount they received three years ago.
The decline in mortgage interest relief is bad news for endowment mortgage holders in particular. When mortgage interest relief was fully tax deductible, endowments appeared very attractive since the borrower was able to keep claiming that relief for the full term of the loan. Ordinary annuity, or repayment mortgage work on the principle that you pay high interest payments in the first half of the loan period, but these decline as you begin paying off proportionately more capital. The amount of tax relief you can claim declines in the latter half of your loan term, but you are compensated by owning more and more capital in your property. For endowment mortgage holders there is no such benefit since they are paying interest only on the loan and must wait for their capital to be repaid by the growth from the endowment policy fund.
VHI relief on premiums made in the previous tax year were effectively worth 37.50 per cent in 1995/96 (down from full 48 per cent relief in 1994/65). For the 1996/97 tax year the relief is now at the standard 27 per cent. Anyone paying £700 in VHI premiums in 1993/94 would have enjoyed tax relief of £336 in 1995/96; the same payment in 1994/95 would have resulted in a tax deduction of £262.50 last year. Anyone who paid £700 in VHI last year will receive a deduction of £189 - ie. 27 per cent.
Finally, PAYE and self employed taxpayers should ensure that these changes in tax relief are applied immediately by their company accounts offices or to their personal accountants. If the reliefs are not adjusted you will face a tax demand for the difference, plus interest.
