Lower-paid workers will benefit most from the package of measures announced by Mr McCreevy in his 1999 Budget. But the package means that all taxpayers get some increase in take-home pay despite the moves to restrict tax allowances to the standard tax rate.
However, one issue which has not been tackled in the Budget is that workers still move up to the top tax rate at relatively low income levels - £14,000 for a single worker in 1999/2000 and £28,000 for a married couple.
The Budget will increase the take-home pay of lower and middle income workers and take more people out of the tax net. The combination of the increases in the income band taxed at the standard rate and increases in the tax allowances will take about 80,000 people out of the tax net, according to Department of Finance figures. Taking all the measures as a package, lower income workers will be significantly better off. Top earners will not gain as much because their personal and PAYE allowances will be restricted to the standard tax rate of 24 per cent from the current top rate of 46 per cent. And some of the gains for middle income earners - those earning between about £15,000 and about £25,000 - from the increase in the standard rate income band and the increase in personal and PAYE allowances, will be clawed back by the restriction of their personal allowances to the standard rate and the rise in the PRSI income ceiling to £25,400.
The biggest winners are single and married workers earning between £10,750 and £11,250 a year. They get the benefit of the increases in the income band and the personal allowances like all taxpayers. But since all of their income was already taxed at the standard 24 per cent rate they will not be affected by the restriction of the allowances to the standard rate. In addition, they benefit most from the increase in the income floor for payment of the health levy. The increase from £10,750 to £11,250 means they will not pay any levies in 1999/2000 - a tax saving of 2 per cent of total income.
Mr McCreevy has acted to reform the tax system with his moves to convert basic income tax allowances into tax credits at the standard rate. The move is a continuation of a reform that started a few years ago when mortgage interest relief and VHI premiums became tax credits rather than tax allowances.
Tax reliefs given as allowances benefit higher-paid workers most. That is because the higher the taxpayers' allowances, the more of their income is taxed at the standard rate. Allowances are added together and deducted from total income to get taxable income. So allowances reduce the amount of income that will be taxed at the top tax rate. For a taxpayer at the top tax rate an allowance of £1,000 is worth £460 while it is only worth £240 to a standard rate taxpayer.
Under a system of tax credits a tax allowance has the same value to all taxpayers. The system for calculating tax due is completely different. Allowances are not deducted from income before income is taxed. Income from all sources is added together and taxed at the applicable rates - in 1999/2000 the first £14,000 for a single person and £28,000 for a married couple will be taxed at 24 per cent and the balance at 46 per cent. Then the allowances at the standard rate are deducted from the tax due. For example, the new £1,000 PAYE allowance will become a £240 deduction for all taxpayers. On their own the moves announced by Mr McCreevy to restrict the personal and PAYE allowances to the standard tax rate would reduce the take-home income of middle and top income earners.
That is because under the current system their allowances are given at the top tax rate so that every £1,000 of allowance is worth £460. But under a credits system with allowances restricted to the standard rate, every £1,000 of allowance will only be worth £240, so they would lose £220 for every £1,000 of allowance. But in his Budget Mr McCreevy has compiled a package of measures to ensure that middle and top income earners will not be worse off next year because of the restrictions of the main allowances to the standard rate. They will be offset by the increases in the standard personal allowances and the PAYE allowance and the widening of the standard income band. Moves away from the current system of allowances towards a credits system are a major reorganisation of the tax system, specifically targeted at helping lower- and middle-income earners and ensuring that all taxpayers are treated equally.
For the people still in the tax net after the increases in the income exemption limits, the widening of the standard rate tax band from £10,000 to £14,000 for a single worker and £20,000 to £28,000 for a married couple will mean more taxpayers will pay tax at the new lower rate. A wider standard rate income band means that more of a taxpayer's taxable income will be taxed at the standard rate. Some 17,000 people are expected to move to the standard rate from the top rate in 1999/2000, according to the Department of Finance. In the current tax year a single person moves on to the top tax rate of 46 per cent when his/ her income goes above £13,950. A married couple with one spouse earning pays tax at the top rate when their income goes above £27,100 and over £27,900 where both spouses are earning.
There are no comparative figures for 1999/ 2000 because the system has changed. All single workers will move into the top tax band when their income goes above £14,000 and married couples will go into the top band when their income goes over £28,000 in 1999/ 2000. But the taxpayers will have add-backs of their allowances at the standard rate.