Brian Lenihan's budget briefcase could contain some nasty surprises on Tuesday, writes CAROLINE MADDEN.
MINI, EMERGENCY or supplementary budget, call it what you will, but Minister for Finance Brian Lenihan’s grand plan for plugging the gaping hole in public finances will be unveiled next Tuesday, and it will have to be leaner and meaner than any budget since the 1980s if it is to achieve its objective.
But exactly what nasty surprises could be lurking in Lenihan’s budget briefcase, and how will they affect the income, spending power and standard of living of individual taxpayers?
The case studies on this page, which have been posed for by models, have been compiled for The Irish Times by PricewaterhouseCoopers (PwC).
They outline how the Government’s adjustment of social welfare benefits and the tax system could either dent or boost individual families’ finances. They will be updated to reflect the budget day changes in The Irish Times’s Budget 2009 special supplement next Wednesday.
So far, only two things are absolutely certain about the budget – spending must be slashed, and taxes hiked.
Exactly how the Minister plans to do this remains to be seen, but a number of options are up for consideration.
Double the income levy
It is considered likely that the Government will double the rates of the new income levy announced in Budget 2009. Currently, three different rates of levy apply, depending on your level of income. A 1 per cent levy is charged on income up to € 100,100 per year, a 2 per cent levy is charged on income of €100,101–€250,120 per year and a 3 per cent levy is charged on income in excess of €250,120.
Next Tuesday, these rates are expected to be brought up to 2, 4 and 6 per cent respectively.
The levy doesn’t apply to anyone with an income of less than €18,304, but all workers whose earnings exceed this threshold may soon see the already painful levy being siphoned out of their monthly pay packet double in size.
Increase tax rates
In recent weeks, there have been calls from various quarters for an increase in the higher rate of tax, which currently stands at 41 per cent and applies to annual income that exceeds €36,400.
Another possibility that has been mooted is the introduction of a third rate of income tax on high earners.
Sinn Féin, for example, has proposed a higher tax rate of 48 per cent on incomes over €100,000 in its pre-budget submission to the Government.
Such a move would dish out the pain to high rollers, but another possibility on the cards is that the Government might seek to draw more low earners into the tax net by reducing tax credits.
However, implementing any such adjustments to the tax system during the middle of the year would prove difficult and slow. Due to the immediacy of its requirements for revenue, the Government is likely to favour the income levy route instead, as this could be implemented more quickly.
Earlier this week, Friends First economist Jim Power warned of the pitfalls of overtaxing consumers, arguing that it’s “not possible to tax one’s way out of a recession, but very easy to tax one’s way into an even deeper recession”. Taxpayers will be praying that the Minister heeds these words of warning.
Cut pension tax relief
It has also been speculated that the tax relief available on pension contributions may be squeezed in the upcoming budget.
One rumour is that relief at the higher rate of income tax on pension contributions is to be scrapped, and that relief will only be available at the standard rate.
However many commentators have warned that cutting tax relief would be a retrograde step.
“Now is not the time to remove any assistance to taxpayers to fund their own pensions, thereby reducing the future burden on the State,” the Irish Taxation Institution argued in its pre-budget submission.
Abolish PRSI ceiling
Another option which the Government is believed to be considering is the removal of the ceiling on Pay Related Social Insurance (PRSI) contributions by employees.
This ceiling currently caps the amount of income on which workers have to pay PRSI at 4 per cent at €52,000.
Therefore if the ceiling were abolished in the forthcoming budget, higher earners could end up paying hundreds of euro more in PRSI annually.
Reduce benefits
People who are unemployed, parents, carers, or indeed anyone relying on State benefits, will be listening anxiously next Tuesday afternoon and hoping that the rumours of certain benefits being reduced – or becoming means-tested – prove to be unfounded.
Property tax
Property owners and landlords are bracing themselves for the possibility of another body blow.
The October budget saw the introduction of a €200 annual tax on second homes. Sinn Féin has proposed that this should be hiked to €600, and that tax relief on mortgage interest for landlords be cut in half.
There is also speculation of a new property tax being introduced. For anyone who already forked out significant amounts of their life savings in stamp duty buying a home, any further tax on their property would be a bitter pill to swallow.
Capital gains tax, which was raised from 20 to 22 per cent in Budget 2009 could possibly be increased again, although with property and share values through the floor, only the fortunate few will actually be realising a capital gain any time soon.
Target cigarettes and alcohol
Will the Government target the old reliables of tobacco, alcohol and petrol? According to Jim Power, there is scope to increase excise duties on these goods in the budget.
However, smokers will be glad to know that Lenihan appeared to rule out a tobacco price recently.
DUAL-INCOME FAMILY
PAUL AND CLAIRE are in their early 40s and live in Wicklow with their two children, aged seven and nine.
Paul works as a laboratory technician and earns an annual salary of €45,000. He makes pension/AVC contributions of €240 per month. Paul's employer pays his annual health insurance of €2,300 and gym subscription of €500. Claire works as an office administrator and earns €28,000.
As their after-school childcare costs are €500 per month, they are very anxious that the Minister does not reduce the level of childcare benefits or introduce means testing for these benefits. Otherwise, Claire is considering a reduction in her working hours to care for their two children after school hours.
As they are paying tax at the higher rate they hope that the Minister does not increase this rate of tax or that the Minister does not introduce a third tax bracket which could see them paying even higher rates of tax. They are already feeling the impact of the 1 per cent income levy since January 1st, 2009.
They have heard rumours that the Minister may seek to "standard rate" all allowances and hope this is not true.
SINGLE WORKER
EMILY IS single and 30 years old and has been living in Kildare for the last four years. She works as a nurse in Tallaght Hospital and earns an annual salary of €32,500. Emily owns her own two-bedroom apartment and rents the spare room for €600 per month to a work colleague. She avails of the rent-a-room relief and, therefore, does not have to pay income tax on the rental income.
She hopes the Minister will not abolish the rent-a-room relief in the upcoming budget so she can continue to receive this rental income tax free, as any income tax on this amount would impact on her ability to afford the mortgage repayments on her apartment.
Emily is also very upset at the introduction of the public service workers' pension levy. Emily feels the levy was far too severe on public servants who have low to moderate incomes. She hopes that the Minister will listen to the public sector unions and will eliminate the pension levy in the upcoming budget or, at the very least, reduce the level of the levy because at the present level she feels that she is struggling to pay her bills.
Emily is considering doing a part-time course in child psychology to increase work opportunities and hopes that the Minister will introduce changes to allow her to claim tax relief for tuition fees on part-time courses.
SINGLE-INCOME FAMILY
ROSS AND ELEANOR are a single-income family living in Dublin in their family home with their three young children, aged 10, eight and four.
Ross works as a restaurant manager and earns €75,000 a year, while Eleanor stays at home to care for their children on a full-time basis.
Ross has heard rumours that the PRSI ceiling applicable to employees will be removed, leaving him to pay PRSI on his income in full, but he is hopeful this will not happen. He is also concerned at the prospect of an increase in the lower and higher rates of income tax, together with increases in the rates of the income levy.
Ross hopes the Minister does not increase the duty on alcohol as he would fear the impact that would have on the restaurant where he works.
He has already witnessed a slowdown in trade over the past few months and is worried about losing his job, particularly as Eleanor does not have an income.
If this does happen, he hopes rumours of welfare benefits being means-tested are untrue.
They also receive child benefit payments in respect of their children and the Early Childcare Supplement in respect of their youngest child, who is four.
They are also concerned that there will be restrictions on their entitlement to claim these payments.
HIGH-INCOME BUSINESS OWNER
DANIEL AND JESSICA are married, in their early 60s and live in the Dublin suburbs. Daniel owns a graphic design company and employs four people, while Jessica does not work outside the home. They have two children, both of whom are attending university. Daniel's annual salary as a company director is €162,000 and he claims relief for personal pension contributions, up to the 40 per cent limit on which tax relief is available to him, up to the maximum annual earnings ceiling of €150,000 introduced in the last budget. Daniel is worried that the Minister will cap tax relief on pension contributions to the standard rate of tax.
As he is nearing retirement age, he hopes to commute part of his pension into a tax-free lump sum on retirement and hopes the Minister does not seek to introduce a tax rate on this payment
Jessica's elderly father lives nearby and has Alzheimer's. As he needs assistance caring for himself, Daniel and Jessica pay €25,000 towards the cost of home nursing care each year. They claim the dependant relative tax credit and also claim tax relief on the qualifying medical expenses incurred for the nursing care in his home. They were disappointed that the Minister limited tax relief on this expense to the standard rate of tax in the last budget and are hoping no further limitations on relief are announced.
Daniel hopes the Minister does not introduce a higher third rate of tax or increase the current higher rate of tax beyond 41 per cent. Daniel is also worried that the Minister will increase the income levy rates, which he currently pays on his income at 1 per cent and 2 per cent.
Daniel and Jessica are also hoping that the Minister does not bring in changes whereby higher earning families would be obliged to pay for third-level undergraduate studies. They are also hoping they will continue to be able to claim tax relief for university fees they pay for their eldest child's postgraduate studies.
LOW-INCOME WORKER
JAMES IS a single man in his early 30s living with his elderly parents. James was made redundant from his job as a construction worker in early 2009 and has since been receiving the Jobseeker's Benefit. He is finding it very difficult to make ends meet and is reliant on his parents for additional support. He hopes the Minister might increase the level of the Jobseeker's Benefit available to him and that it does not become a means-tested payment.
James is also a smoker and social drinker and hopes the Minister will not significantly increase the duty on cigarettes or alcohol in the budget.
He also hopes the Minister will introduce measures designed to ease the PRSI burden for employers in hiring new staff, in anticipation that he will be successful in finding new employment at some stage later in 2009.
COHABITING COUPLE
JOHN AND MARY are not married and have been living together for the past nine years. They jointly own their family home in Westmeath. John also owns an apartment in Dublin, which he lived in prior to moving in with Mary and rents to young professionals.
John works as a bank manager. His annual salary and rental profit amount to €95,000 a year. Mary stays at home to look after their two children, aged seven and eight. Currently, John is entitled to take a deduction for mortgage interest payments on his rental property when computing his rental profit for income tax purposes.
John and Mary hope, given the recent economic slowdown, that the Minister does not increase the rates of tax or the income levy. John is also concerned that the Minister may introduce some form of property tax for rental properties or that he will remove or restrict the deduction for mortgage interest payments on his rental property when computing his rental profit for income tax purposes.
SINGLE PARENT
CIARA IS a single parent living in rented accommodation in Limerick with her son, aged two. She is a part-time hairdresser and earns €25,000 a year. She also qualifies for Family Income Supplement.
She appreciates the early childcare supplement for children under five and hopes that the amount and the age limit will not be decreased any further in the emergency budget.
Ciara hopes to purchase an apartment shortly and has placed her name on the Affordable Housing Scheme list. Her parents are prepared to help her with the deposit required if she is successful in her application and she hopes to obtain a mortgage from her local authority. However, as she is expecting to receive a pay decrease shortly, she will find the mortgage repayments difficult to meet and she hopes the Minister will increase the mortgage subsidy available to low-income individuals.
Ciara hopes that her personal tax credits, including the one-parent family tax credit will not be reduced. Ciara also hopes that the standard rate of tax will not be increased.
PENSIONERS
CIARAN AND MARIE are married and living in Galway.
Ciaran is in his late 60s and is retired while Marie is about to turn 65 and works part time. Ciaran has an occupational pension of €37,000 and also receives dividends of €5,000 a year, together with the State Contributory Pension.
Marie earns €14,000 from her part-time job and is not a member of an occupational pension scheme.
Marie enjoys her job and she understands that she will have to wait until she is 66 to receive a State Pension while continuing her part-time job.
Marie hopes the Minister will not introduce any restrictions preventing her from claiming the State Pension at age 66 while continuing to work.
Ciaran and Marie also own a property in Dublin which their children occupied while attending university.
Their youngest daughter has recently vacated the property and they are currently renting it.
They are worried the Minister will abolish tax relief for mortgage interest payments on rental properties. If this measure is introduced they might consider placing the property on the market for sale.
They hope that the Capital Gains Tax rate, which increased to 22 per cent in the last budget, will not increase further.
They hope the Minister will not decrease the standard rate band or personal tax credits and they hope that he does not introduce an increase to the rates of tax or to the income levy.
