A person earning €50,000 will have at least €3,000 less but some people stand to lose even more, writes CONOR POPE
NO MATTER how you look at the Government’s austerity measures announced yesterday, they are not good news for Irish households.
A person earning €50,000 a year will have at least €3,000 less in their annual pay packet by the time all the elements of the plan are played out.
For some people it could mean the end of family holidays, for others perhaps the loss of private healthcare. For those on lower incomes, the cuts may lead to poorer diets, colder homes and a whole lot of other deprivations unthinkable just three years ago.
With property and carbon taxes coming in the next two years, and water charges from 2014, as well as increases in VAT, excise duty and income tax on the way, there will be few people after budget 2011 feeling untouched.
That goes for the older people too, despite the retention of the State pension at its current level. Cuts in social welfare payments and new health charges will cause some hardship across the generational divide but just how evenly spread the pain will be is unclear.
Some people stand to lose an awful lot more than €3,000 a year. Middle income families with children at university will be among the hardest hit and they will begin to feel the pain almost immediately.
From next year, the entry point for income tax will begin to change; the exact details and timing of the changes have yet to be announced. Today a single PAYE worker needs to earn €18,300 before they have to pay income tax but this will start to drop from next year and by 2014 it will have fallen by €3,000.
This means the take-home pay for a single person earning €55,000 will fall by €1,860 a year or €36 a week. As economic think tank Tasc pointed out, a single person on €40,000 a year will see their income tax bill rise by the same amount as a person earning €300,000 annually, although the higher earners will be hit farther down the track.
For a married, one-income family earning €55,000 annually yesterday’s news will be bleaker still. Under the proposals, their take-home pay will fall by €2,310 a year or €44 per week, a drop of 5.4 per cent.
It gets worse. If this family have two children in university they will have to find a further €1,000 a year to cover the increase in student registration charges which are to go up next year by 33 per cent from €1,500 to €2,000.
Already this notional family is worse off to the tune of €3,310 and 2011 will have barely started. If they live in rented accommodation, pay their union dues or are in the fortunate position of having their childcare paid for by their employer they are going to get a rude awakening in the new year when a whole range of Benefit in Kind (BIK) entitlements are abolished.
Those living in a rented house will be dismayed to learn that tax relief on their accommodation, which is worth a maximum of €800 a year to a married couple – and half that to a single person – is to go next year.
Also being scrapped is tax relief on trade union subscriptions worth a further €70 per year per union member. All told the plan proposes the abolition of 10 tax reliefs including income tax age credits for people aged 65 and over.
To this, families will have to also factor in cuts in the children’s allowance which have been signalled although quite how deep these cuts are going to be is unclear and no formal announcement is likely ahead of next month’s budget.
The minimum hourly wage will be reduced by €1 to €7.65 as the Government believes the current rate is a barrier to job creation.
Another significant change concerns tax relief on pension contributions. This too will be implemented almost immediately. It will hit high and middle earning taxpayers hardest.
At present an employee who makes pension contributions is entitled to tax relief at the top rate of 41 per cent. To this they can add their PRSI and health levy payments so the full tax relief on a pension contribution is 49 per cent. That means that for every €100 they pay into their pension pot it costs them just €51.
Under the plan, the PRSI and health levy relief on pension contributions will be scrapped next year so for every €100 a person pays into a pension fund in 2011 they will have to pay €57. If the wage earner in the €55,000 a year one-income family contributes €4,000 to their pension in 2011 , the changes will cost them a further €320 each year.
The changes to the tax relief on pensions will hit people who are close to retirement and are paying higher sums into their funds hardest but a glimmer of good news is that there is no proposal to change the existing State pension rate although many people may feel that glimmer is extinguished when they learn that under the plan the age at which people qualify for the pension will rise to 66 in 2014, 67 in 2021 and 68 in 2028.
While the Government is to frontload the cuts by imposing €6 billion of them next year, 2012 will not be much better. The rate of tax relief on pension contributions will fall from 41 to 34 per cent and income taxes are likely to increase, although the Government has not indicated by how much. Then there is the introduction of a property tax. In the absence of any class of official property valuation system, the Government wants to introduce a flat fixed property or site value tax of €100 in 2012. It will apply to 1.8 million households. 2012 will also see increases in carbon tax. The plan is for it to double from €15 per tonne to €30 by 2014. This will drive petrol and home heating oil higher. The carbon tax was introduced in the 2010 budget when Minister for the Environment John Gormley claimed it would be a “revenue neutral” measure, with the funds used to lower carbon emissions, support energy efficiency and alleviate fuel poverty. Now it is to contribute €330 million to the “overall correction”. It applies to fossil fuels, including petrol, diesel, coal, turf fuel, oil and gas.
In 2013 the full value-based property tax will come into being and it is expected it will cost the average household €200. In 2013 the tax relief on pension contributions will fall to 27 per cent. In just over two years our VAT rates will also start to rise with the standard rate increasing from 21 to 22 per cent.
In 2014 water taxes will become a reality for consumers. People will be allowed 40 litres of water per day for free – a shower will use up about 20 litres – after which the metered charges kick in. By 2014 the tax relief on pension contributions will have fallen to 20 per cent and that €4,000 pension contribution made by the sample family will be costing it €1,160 more each year. VAT will have increased from 21 per cent to 23 per cent, which will add a further €200 to the family’s eventual tax bill.
When all is said and done and the measures announced yesterday and those yet to be announced could see well over 10 per cent knocked off the net pay of this family on €55,000 a year, and that will amount to a whole lot more than a lost holiday or two.