More pain than gain – (Sunday Business Post) [PIBA release quoted here]

04 November 2011
Concerned about how the recent developments will affect your wallet? We examine the repercussions of last week’s Finance Bill.
The publication of the Finance Bill last week gave effect to measures announced in October’s budget and introduced additional measures designed to shore up the state’s coffers.
For taxpayers, the overall picture is not rosy: January’s pay packet will almost certainly be smaller than December’s. ‘‘On the personal tax side, the income levy is probably the biggest thing,” said John Bradley, tax partner with KPMG.
In his inaugural budget last month, the Minister for Finance, Brian Lenihan, introduced an income tax levy that will come into effect on January 1. Last Thursday’s Finance Bill gave further details of how this would work in practice and announced a new, higher rate of 3 per cent for top earners.
Depending on how the economy fares in the coming months, next year’s budget could also bring bad news for the average taxpayer. David Fennell, tax director at Ernst and Young, predicted that next year’s budget will announce an overhaul of the PRSI system.
However, he believes there is little scope for further income tax increases. ‘‘There is only so much they can milk from the middle classes,” he said.
For now, the imposition of the levy is the key additional burden for employees. People with a salary of up to €100,100 will face a levy of 1 per cent of their gross salary, while those earning between €100,100 and €250,120 will be charged 2 per cent. Anyone earning more will be hit with the highest rate of 3 per cent.
Social welfare payments will be excluded from the levy, but rent, investment income and so forth will be subject to it. Brian Keegan, director of taxation at the Institute of Chartered Accountants (ICAI), said: ‘‘The easiest way to explain it is that pretty much everything is included.”
There will be some leniency for lower earners and older people. Anyone earning €18,304 or less will not have the levy applied to their salary. ‘‘People on the minimum wage are out, but there is no marginal relief,” Bradley said.
This means someone earning upwards of €18,305 will have to pay 1 per cent of their entire salary, not just the amount above the exemption threshold. It will create a serious problem for both employer and employee when a planned wage increase carries someone over the threshold and thus exposes their entire income to the 1 per cent charge.
Those over 65 with a gross income of €20,000 or less will also be exempt from the levy. The limit doubles to €40,000 for a couple aged over 65.
The Finance Bill made effective the new income tax rate bands. The single standard rate band was increased by €1,000 to €36,400. For married couples with one income, the band was also widened by €1,000 to €45,400. Double-income married couples will now pay tax at 20 per cent on income up to €72,800, up from €70,800 previously.
Increasing the standard rate band by €1,000 means taxpayers are €210 better off over the course of the year, as the rate of tax they pay on that €1,000 falls from 41 per cent to 20 per cent. However, a person earning €50,000 will have to payout €500 under the new income levy, negating the benefit of the broader rate band. They would end up €290 worse off.
There were no changes to personal tax credits. ‘‘Tax credits have not been indexed. This means you are effectively paying a higher rate of tax,” said Keegan. He said the combination of the income levy and the lack of indexation of credits meant everybody would ‘‘feel the bite’’.
It’s not just current income that will be affected by the measures in the Finance Bill - future income could also change as a result. The Professional Insurance Brokers’ Association (Piba), the country’s largest group of independent brokers, said last week’s Finance Bill and October’s budget were bad news for people funding their own retirement.
According to the Piba, the pension measures announced in the budget, and confirmed in the Finance Bill, were regressive and penalised people who had already seen their pension funds fall in value this year as a result of tumbling stock markets.
Diarmuid Kelly, chief executive of Piba, said: ‘‘The decrease in the ceiling for income allowed to be claimed when making pension contributions from €275,000 to €150,000 means that the maximum a 50-year-old can contribute to a pension, and claim relief on, reduces from €82,500 to €45,000.”
Kelly said the measure was ‘‘particularly harsh’’ on late starters and marked a u-turn on pension policy. ‘‘Many people leave pension funding until late in life, when the onerous pressures of child rearing and mortgage payments ease,” he said.

While income and pensions may be two of the largest hits for taxpayers, a number of other changes introduced will see people’s wallets become skinnier in the months ahead.
Tax relief for medical expenses will be granted at the standard rate of 20 per cent from January 1,while previously it was subject to relief at the marginal rate of 41 per cent.
First-time buyers will benefit from increased mortgage interest relief, but other buyers will see their interest relief fall from 20 per cent to 15 per cent. From January 1, the value of savings will fall somewhat, due to a 3 per cent hike in deposit interest retention tax (Dirt).
Employees who have a car space at work will wave goodbye to €200 in 2009, following the introduction of a parking levy.
This will only apply in certain urban areas around the country, and a reduced rate of €100 will be available under some circumstances, such as space sharing, maternity leave and so on. Fennell said this would create an ‘‘administrative nightmare’’ for employers.
Consumers will see their relative purchasing power fall from December 1, as the top rate of value added tax (Vat) will increase by 0.5 per cent, to 21.5 per cent.