Most taxpayers will be better off in tax year 2001 as a result of the measures announced by the Minister for Finance, Mr McCreevy, in yesterday's Budget.
A wider standard rate tax band, the two percentage point cuts in the standard and top tax rates, increases in the personal and PAYE allowances and the reduction in the PRSI contribution rate will benefit most taxpayers. About 107,000 taxpayers will come out of the top tax net.
Changes in PRSI arrangements for the self-employed and proprietary directors, however, could wipe out most of the tax benefits for higher earners in this group. With the removal of their PRSI income ceiling of £26,500 (€33,648) and their exemption threshold of £1,040, they will now have to pay PRSI on their gross income. While their PRSI contribution rate has been reduced from 5 per cent to 3 per cent, high earners will pay more.
A PRSI bill of £1,273 on an income of £80,000 this year would rise to £1,776 in the shorter tax year 2001, or £2,400 in a full year. This category of taxpayer will not benefit from the rise in the PAYE allowance.
Employees will benefit from a reduction in the PRSI contribution rate to 4 per cent from 4.5 per cent. But some of the benefit will be clawed back from higher income earners because of the increase in the income ceiling to £28,250 from £26,500. Single people earning about £20,000 and dual income married couples earning about £40,000 will benefit most from Budget 2001 tax measures. But when the increase in child benefit, which is not a tax measure, is taken into account, couples with children will be the big winners. Single income couples with children who qualify for the Home Care Allowance will fare best of all.
Middle income married couples where both are earning about £20,000 each will be among the biggest beneficiaries, before the child benefit measures are taken into account. They will get the most out of the continuing move towards individualisation of the standard rate tax band. They will gain from an increase of up to £6,000 in the amount of income that will be taxed at the standard rate, the reductions in the tax rates and a lower rate of PRSI contribution.
When the impact of the increases in child benefit payments from June are factored in, the biggest beneficiaries will be married couples on lower to middle incomes who have four or more children. In addition to the tax measures they will gain from the £25 per month increase in child benefit for the first and second children and £30 rise for third and subsequent children. A single income married couple with four children earning £16,000 will gain £1,726, equivalent to just more than 10.3 per cent of their net income. A single income married couple with four children on an income of £35,000 will be £2,323, or 8 per cent of net income, better off.
A dual income married couple with two children on £40,000 would gain £3,260 or 10.4 per cent, assuming their incomes divided 65 per cent to 35 per cent. This compares with a gain of £1,825, or 6 per cent, for a single income couple on £40,000 with two children and a gain of £1,385, or 4.8 per cent, for a married couple with one income of £40,000 and no children. The biggest winner among single taxpayers is on an income of £20,000. They gain £1,380, or 9.1 per cent. They gain most from the increase in the standard rate band. Budget 2001 is the most generous and costly to the Exchequer of Mr McCreevy's four Budgets. Increases in the personal and PAYE allowances/credits will take 133,000 people out of the tax net. This compares with about 40,000 last year.
A single person will not enter the tax net in tax year 2001 until he/she earns more than £144 per week (now £110). A single income married couple will be able to earn £250 per week before entering the tax net (now £200). For a dual income married couple the figure is £289 (now £219).
The widening of the standard rate income band will mean 107,000 people will no longer pay tax at the top rate from April - about 125,000 people stopped paying top-rate tax after last year's budget.
As the tax year is moving to a calendar year from January 1st, 2002, the next tax year will be shorter than usual, running from April 6th, 2001, to December 31st, 2001. To make it easier to see how Budget 2001 affects you, the tables show the Budget changes in monthly take-home pay. In Budget 2001, the personal allowance has been increased from £4,700 for a single person to £5,500 and from £9,400 for a married couple to £11,000.
The PAYE standard rate band has increased by £3,000 to £20,000 for the single person. For the married couple with two incomes the maximum income band that can be taxed at the lower rate rises £6,000 to £40,000 with a £1,000 increase in income that can be transferred between the couple to £29,000. This is continues the individualisation of the standard rate band started last year. The standard rate tax band for a married couple with one income will rise by £1,000 to £29,000.
The Budget measures will affect pay for all categories of taxpayer from April 6th, 2001. The child benefit measures come into effect from June 2001.
For example, tax deductions as a percentage of income for a single person on £20,000 will fall from 24.4 per cent to 17.9 per cent of income. For a single person on £75,000 deductions are down from 40.8 per cent to 38.1 per cent of income.