Since this Government came into office we have increased the entry point to the income tax system from £77 per week to £110 per week. I am proposing today to increase this entry point to £144 per week by increasing the basic personal allowances by £800 single and £1,600 married to £5,500 and £11,000 per annum respectively and by increasing the PAYE allowance from £1,000 to £2,000 per annum. These measures and those for the aged which I will come to shortly will remove 133,000 taxpayers from the tax net. This is over three-quarters of the total that were exempted in the last three years.
The Government intends in the next Budget to increase the entry point towards the level of the minimum wage, thereby removing up to a further 150,000 taxpayers from the net.
Widening the Standard Band
This Government set out to reduce the number of taxpayers on the higher rate of income tax. Many of these taxpayers are earning incomes that are just above the average industrial wage. These are hardly the wealthier part of our community, for whom high marginal tax rates are usually reserved.
I have decided, accordingly, to widen the single person standard rate income tax band by £3,000 from £17,000 per annum to £20,000 per annum, with consequential increases for double earners. The married one-earner band will increase by £1,000 from £28,000 per annum to £29,000 per annum, with transferability of bands between spouses thereby increased also to £29,000. This process of widening the standard rate band will be pursued in future Budgets.
As a result of this band-widening, the proportion of income earners on the higher rate will fall to 23 per cent.
Income Tax Rates
The marginal rate at which tax is paid has an effect on the incentive to work. Clearly we should seek to reduce the disincentive effect of tax rates in a manner that includes all taxpayers, over 500,000 of whom now pay tax at the higher rate.
The Government has decided, therefore, to reduce the standard rate and the higher rate of income tax by 2 percentage points in each case, that is, from 22 per cent to 20 per cent and from 44 per cent to 42 per cent.
Distribution of Income Earners
As a result of these changes, the percentage of income earners in the tax exempt category will be 38 per cent, those on marginal relief will represent less than one per cent and those on the standard rate and top rate 39 per cent and 23 per cent respectively. There will therefore be 668,000 persons in the tax system who will be exempt from paying tax altogether.
Reform of PRSI and Levies
In my last Budget I announced that it was my intention to address the whole area of PRSI and Levies in my next Budget to see if I could rationalise the current complex structure of different allowances, thresholds, rates and ceilings. As a first step in this reform I propose to make a number of changes this year. Apart from employer PRSI which I will be coming to later, the changes relate to the self-employed and full-rate employee categories.
The Government has decided that the PRSI income ceiling for the self-employed and proprietary directors should be removed and that the contribution rate for this category should be reduced from 5 per cent to 3 per cent. We are also abolishing the PRSI free allowance of £1,040 per annum for the self-employed and reducing the minimum payment to £200 per annum. Most of the additional revenue from removing the ceiling comes from those earning £100,000 per annum or more. Allowing for the reduction in the rate on existing contributions and other adjustments, the net yield from the changes is £21 million in a full year.
The ceiling for employee PRSI contributions is being increased from £26,500 to £28,250 per annum, which reflects the normal earnings-related increase as was assumed in the Estimates. In addition, I have decided to reduce the Class A contribution rate paid by most employees from 4.5 per cent to 4 per cent. This will cost some £63 million in a full year.
Total Cost
The full year cost of these personal tax and PRSI changes in this Budget is £1,231 million of which £540 million represents changes to allowances, £278 million changes to bands, £371 million changes to rates, and £42 million changes to PRSI.
Increases in Disposable Earnings
This Government has ensured that through social partnership, workers' living standards have been raised substantially. Compared with last year, a single worker on the estimated average industrial wage has £1,602 more in his or her pocket in a full year due to wage increases and tax reductions in my last Budget. This overall increase represents a 13 per cent increase for that worker's disposable earnings on last year. This is more than double the average inflation rate this year of 5.5 per cent.
After today's Budget, this worker next year will not only receive a further 5.5 per cent from the second phase of the PPF, and an additional 2 per cent as a result of the adjustments agreed on 4 December, but will also benefit from tax reductions in this Budget to give a total increase in disposable income next year of 13.5 per cent.
Tax Relief for the Elderly
The Government is committed to reducing the tax burden on the elderly. I am therefore increasing the income tax exemption limits by £1,000 for a single person and £2,000 for a married couple. This means that since I took office the exemption limits for the aged have been increased by up to 85 per cent.
Planning for Future Care Needs
In line with what I have done on pension reform, I also favour providing tax relief at the standard rate for premia on insurance products geared at providing for future care needs, with any stream of income in the future being taxable. Discussions will take place with the Insurance industry before the Finance Bill to see if we can develop an appropriate scheme to provide for such specific and ring-fenced products. This will also contribute to the overall strategy of encouraging savings and providing for real future needs.
Medical Expenses Relief
Medical expenses relief currently can only be claimed in respect of a relative where the claimant qualifies for a dependent relative allowance. I will be changing the rules to allow people to claim medical expenses relief where they are paying on behalf of a dependent relative whether or not they qualify for the dependent relative allowance. I am also removing the existing restriction on relief for routine maternity care. Where a person is employed to care for a family member who is incapacitated, a carer's allowance is claimable. The amount allowable was last increased in Budget 1998 to £8,500. I propose to increase it to £10,000 per annum.
Corporation Tax
As part of the move to a single standard corporation tax rate of 12-1/2 per cent, the rate of corporation tax which will apply from 1 January 2001 will be 20 per cent on trading income as provided for in the 1999 Finance Act. Last year in order to assist small and medium-sized firms, I decided that the prospective 12-1/2 percent rate of tax should apply from 1 January 2000 to the trading income of a company where that trading income does not exceed £50,000 per annum. I propose to increase this ceiling from 1 January 2001 to £200,000 trading income per annum. This means that only just over 13 per cent of companies liable for tax will now pay at the standard rate. The total cost of both changes is £214 million in a full year.
Stock Valuation at Discontinuance of Trading
I have recently been informed of a tax avoidance scheme based on a loophole in relation to valuation of stock at discontinuance of trading. The 2001 Finance Bill will contain provisions aimed at closing off this loophole with effect on and from today. The details of these provisions are contained in the Summary of Budget Measures.
Capital Allowances
Capital allowances for plant and machinery apply on a straight line basis over a seven year time period. I now propose to reduce this to five years from 1 January next. Motor vehicles have historically been excluded from the seven year straight line system. They will now be included in the five year straight line system. The car value threshold for both new and second-hand cars will also be increased to £17,000. This move will benefit the business sector as a whole including the self-employed sector. It will result in a substantial cash flow loss to the Exchequer of up to £140 million in the next few years.
Employer PRSI
The employer PRSI contribution ceiling now stands at £36,600 and was assumed to increase to £39,000 in the Estimates. In line with the reform of the self-employed ceiling which has already been mentioned, the Government has decided that this ceiling should be abolished. Over and above the Estimates decision, this measure will bring in £159 million in PRSI in a full year as well as an additional £10 million for the National Training Fund. This initiative must be seen in the context of the substantial reduction in business taxation in this and earlier Budgets.
Social Insurance Fund
Thanks to the strong economic performance of recent years and the reforms proposed, the Social Insurance Fund is in a healthy financial situation; moreover, on the basis of current forecasts, this position is projected to strengthen further in the immediate years ahead. It is important, of course, that the Fund's surplus should be used to best advantage, having regard to emerging demands and the overall interests of its contributors. Accordingly, I propose, in consultation with the Minister for Social, Community and Family Affairs, to have an early examination of possible strategies in this regard.
BES and Seed Capital Scheme
The Business Expansion and Seed Capital Schemes are due to lapse on 5 April 2001. I propose to renew these schemes to the end of 2001 while a review is carried out by the Department of Enterprise, Trade and Employment on their continued effectiveness. I also propose to recognise County Enterprise Boards for the purpose of certifying suitable projects under the schemes.
Farmer Taxation
Turning to farmer taxation, I am proposing a number of tax incentives in this area which are aimed at promoting increased farm investment. Firstly, farmers like other business sectors will gain from the general increase in the annual capital allowances for investment in plant and machinery from 15 per cent to 20 per cent. Secondly, I am proposing to renew both the general 25 per cent stock relief and the special 100 per cent stock relief for certain young trained farmers for a further 2 years from 6 April 2001, subject to conformity with EU State Aid rules. Thirdly, I am extending the time-period for reinvestment for roll-over relief for capital gains tax purposes, where farmland is the subject of a compulsory purchase order for roadbuilding. The details are contained in the Summary of Budget Measures. Finally, the flat rate of VAT charged by unregistered farmers to registered traders and the associated VAT rate for livestock will be increased to 4.3 per cent from 1 January.
Probate Tax
Probate tax was introduced in 1993 as a limited revenue raising measure to compensate for the low yield from taxes on capital generally. I have always held it to be an invidious tax, penalising small legacies unduly. Over the years its scope was narrowed because of its wide and sometimes harsh effect. I increased the exemption threshold last year from £10,000 to £40,000 but this year I have decided to abolish the tax fully at a cost of almost £30 million in a full year to the Exchequer.
Rented Sector Reliefs
A Commission was established last year to examine the rented housing sector and to make recommendations to improve its operation. The Government is considering the Report of the Commission and its recommendations will be examined for the Finance Bill.
Rent a Room
There are many homes where the possibility exists of spare accommodation being rented out. A barrier is often the fact that such income is taxable. I am providing that gross rental income of up to £6,000 per annum from the provision of residential accommodation in a person's principal private residence will be exempt from tax. Where an individual claims this relief, mortgage interest relief, the capital gains tax relief on one's principal private residence and the stamp duty relief on owner-occupied residences will continue to apply.
Rent Relief
I am conscious of the impact on some tenants of the increasing cost of rent. Currently, rent relief allowed for under 55s is significantly less than for the over 55s. I am therefore increasing the rent allowable for under 55s from £750 per annum to £1,000 per annum for a single person and from £1,500 to £2,000 in the case of a married couple. In the case of widowed persons I will be increasing the rate of relief for widowed persons to the married rate in all cases.
Trade Unions
I have received strong representations from ICTU and individual trade unions for tax relief on trade union subscriptions. Having considered the case and in recognition of the role of trade unions I propose to provide a flat rate allowance of £100 at the standard rate of tax in respect of trade union subscriptions. £100 is roughly the amount most members pay each year.
Gainsharing, Profit Sharing and Share Options
Giving employees a stake in their company or organisation's future is an important way of recognising and rewarding work and effort. There are a number of schemes already applying in this area. A consultative committee established under the PPF has been examining the potential for encouraging gainsharing, profit sharing and share option schemes by the provision of favourable tax treatment and I will give careful consideration to the outcome of these discussions in that context. I will be considering these matters further for the Finance Bill.
Major Changes in Tax Administration
This is a time of major change in tax administration. By April next, the changeover to the more equitable system of tax credits will be completed and the process of moving the income tax year into line with the calendar year will begin. And, of course, from January 2002, all taxes will be paid in euro.
I would like at this point to pay my own personal compliment to the management and staff of the Revenue Commissioners at all levels who managed under great pressure and with little advance notice to implement the major reforms of the income tax system which I have made over the past two years. The dedication and expertise of the Revenue Commissioners in coping with this challenge is highly commendable.
Other Taxation
Measures I have further measures in mind to rationalise the tax system. Tax reliefs on the payment of fees for education courses are somewhat complex, all with their own rules. I propose to amalgamate and expand the four reliefs that relate to third level education. Full details will be in the Finance Bill.
In the context of rationalising existing tax reliefs, I will also be examining before the Finance Bill the myriad of tax reliefs for donations of various types to different causes to see if we can come up with a more sensible and coherent system to encourage more gifts for genuinely good causes.
A number of further tax measures not specifically mentioned in my Statement are set out in the Summary of Budget Measures.
Conclusion
In the popular TV series, "Yes Minister", the loyal civil servant, Sir Humphrey often advised his political master as follows:
"To be precise, many things may be done, but nothing must ever be done for the first time."
It will scarcely surprise that I do not subscribe to this political maxim.
This Government is delivering on what it promised the electorate in 1997. We are also delivering on our commitments in the PPF.
The measures I have announced today:
will improve the quality of life of all our people,
will lead to a fairer society, with opportunity for all,
will raise living standards for all, and
encourage and reward effort and enterprise.
This Budget supports social partnership.
It takes significant action to combat inflation.
It continues this Government's programme of tax reform.
It contains the largest ever package of supports for children and their parents.
This is Budget number four in a series of five for this Fianna Fail/Progressive Democrat Government.
It is another stage in the implementation of this Government's programme. My next Budget will complete our programme so that Ireland continues into the twenty-first century as a prosperous, fair and caring nation.
I commend this Budget to the House.