Income Tax Announcements in Budget 2017 Ireland

Question: Discuss about theIncome Tax Announcements in Budget 2017for Ireland. Answer: Introduction Every fiscal year, the government of Ireland presents the budget announcing the fiscal policy changes that involves income tax also. The finance minister of Ireland announced budget on October 11, 2016, which contains the economic and fiscal outlook of the country. Among various fiscal considerations, the taxation is one of the measure policy issues, which is considered while preparing the budget for the fiscal year. This paper discusses measure policy changes pertaining to the income tax. Further, analysis of the tax burden on a PAYE worker before and after the budget announcement has also been made. Three Income Tax Measures The Irish government announced rate cut in the income tax to extend relief to the low income earners and pay workers for the year 2017 (Moneyguideireland.com, 2016). The government has announced rate cut in various areas such as Universal Social Charge (USC) and Deposit Interest Retention Tax (DIRT). Further, the government proposed to increase the tax burden on high income earners by removing the various tax credits that were earlier allowed. However, these credits have not been removed by the government as announced in the budget for the fiscal year 2017. Apart from that the government has also reduced the income tax burden for the self employed person by enhancing the earned income tax credit from 550 to 950 (Moneyguideireland.com, 2016). There are three major areas pertaining to income tax in which the government has made changes for the fiscal year 2017. Those three major areas are universal social charge, deposit interest retention tax, and earned income tax credit (Budget, 2016). The reduction in the universal social charge has been conceived to have major impact on the peoples taxable income. The government has announced in the budget for the fiscal year 2017 that the people earning less than 13,000 will not have to pay universal social charge. Further, the slab rates of universal social charge have also been changed. From the year 2017, the taxpayers having income more than 13,000 will have to pay universal social charge at a rate of 0.50% on the first 12,012 of their income. This rate before budget announcement for the year 2017 was 1% (Revenue.ie, 2016). Further, the next slab bracket rate of universal social charge has also been reduced from 3% to 2.5% and 5.5% to 5%. However, the upper slab bracket rate of universal charge of 8% is unchanged. Further, another upper bracket slab rate of 11% has been introduced in the budget for the year 2017. Thus, the taxpayers having income more than 70,045 will continue to pay universal social charge at the rate of 8% and of the income goes beyond 100,000, this rate will be raised to 11% (Revenue.ie, 2016). Therefore, overall it could be inferred that the government has liberalized the universal social charge for the low income earners while at the same the burden for the high income earners has been increased. Following the policy of reducing the tax burden on the low income earner and enhancing it for the high income earners, the government of Ireland has also announced reduction in the deposit interest retention tax (DIRT) for the fiscal year 2017. The existing DIRT rate of 41% has been reduced to 39% for the fiscal year 2017 and the government also has plans to reduce it by 2% each year till it reaches to 33% (Budget, 2016). The DIRT represents the tax deducted in advance by the deposit takers such as banks, post offices, and credit societies. The rate cut of DIRT will have positive impact on the income and cash position of the taxpayers. After this rate cut, the deposit holders would be able to withdraw more from the interest income earned on their deposits (Budget, 2016). Apart from the above discussed changes, the government has increased earned income tax credit from existing 550 to 950 for the fiscal year 2017 (Budget, 2016). The concept of earned income tax credit introduced in the year 2015 allows tax credit to the self employed individuals and proprietary directors who are not eligible for PAYE employee tax credit. The earned income tax credit or PAYE employee tax credit is allowed to the people having low income. In order to reduce the tax burden on the low income earners, the government has enhanced the maximum limit of earned income tax credit from 550 to 950. However, it is important to note in this regard that both PAYE employee tax credit and earned income tax credit can not be allowed simultaneously (Revenue.ie, 2016). In addition to the above, the government has also enhanced the Home Carer Tax Credit for existing 1,000 to 1,100 from the year 2017 (Budget, 2016). However, this tax credit is allowable only to the marriage couple assessed jointly for the income tax purposes. The increase in the Home Carer Tax Credit reduces the tax burden for the married individuals. Further, the government of Ireland has also announced increment in the allowable interest rates on the mortgages taken on the rented house property. Prior to the budget announcement for the fiscal year 2017, the interest allowed for deduction on the mortgage was 75%, which has now been raised to 80% (Budget, 2016). This enhancement in the interest rate is purported to alleviate the tax burden on the individual taxpayer. Income of PAYE Worker Pre and Post Budget Income tax in case of a PAYE worker is computed with reference to the salary income earned during the year. The gross salary income of the PAYE worker comprises of the payments such as salary, wages, bonuses, overtime pay, commission, and holiday pay (Revenue.ie, 2016). The gross is reduced by the amount of allowable deduction to arrive at the income chargeable to income tax. As discussed earlier that the budget announced by the Irish government for the year 2017 is favourable to low income as it reduce the tax burden. On the other hand, the high income earners have been affected adversely with the increased tax burden. Computations have been shown below to demonstrate the impact of the budget announcement on the PAYE worker: Table 1: Tax position of PAYE worker pre and post budget 2017 Ireland Particulars Gross Income of PAYE worker 2017 Gross income 25,000 55,000 150,000 Pre budget Post budget Pre budget Post budget Pre budget Post budget Income tax 50 50 8490 8490 46490 46490 PRSI 1000 1000 2200 2200 6000 6000 Universal social charge 668 540 2318 2040 9542 9189 Total 1718 1590 13008 12730 62032 61679 Total savings +128 +278 +353 Note: The above computations have been made for private sector married employee having one income with no children and taxed under PAYE Full rate PRSI contributor. From the table presented above, it could be observed that the PAYE worker having income of 25,000 is able to save 128 after the budget announcement. It could further be observed that the position as regards income tax and PRSI remains the same, but the universal social charge is reduced (Budget, 2016). The position after the budget announcement could further be clarified with the help of the following example: (Mr X married having 3 children aged under 12 years) Particulars 2016 () 2017 () Gross income 46500 46500 Income tax 2050 1950 PRSI 1600 1600 Universal social charge 1493 1290 Total tax 5143 4840 Child benefit 5040 5040 Net income 46397 46700 Annual gain 303 % change (annual gain/net income) 0.65% The data presented in the table above shows that Mr X will be able to 303 in the year 2017 as a result of the budget announcement. Further, it could be observed that the income tax and PRSI liabilities are same as these were before the budget announcement. The major change is observed in the universal social charge. The table shows that the universal social charge for the year 2016 was 1,493, which is reduced to 1,290 (Budget, 2016). Moreover, the impact of budget announcement on the self employed person has also been analyzed as depicted in the table presented below: Particulars 2016 () 2017 () Gross income 60000 60000 Income tax 15040 14640 PRSI 2400 2400 Universal social charge 2593 2290 Total tax 20033 19330 Net income 39967 40670 Annual gain 703 % change (annual gain/net income) 1.73% From the data presented in the table given above, it could be observed that a self employed taxpayer will be able to save 703 in the year 2017. These savings comprise of a saving in the income tax of 400 and 303 in universal social charge (Budget, 2016). Conclusion The discussion in this paper revolves around the income tax announcements made in the budget presented by the Irish government for the year 2017. From the discussion, it could be articulated that the government has reduced the tax burden on the low income earners by altering the rates and credit limits. Further, the universal social charge has been reduced by 0.50% from the fiscal year 2017, which will also increase the net income of the taxpayers. References Budget. 2016. Ireland budget for the fiscal year 2017. [Online]. Available at: https://www.budget.gov.ie/Budgets/2017/Documents/Budget%202017%20-%20Full%20document.pdf [Accessed on: 22 October 2016]. Moneyguideireland.com. 2016. Budget 2017: What happened. [Online]. Available at: https://www.moneyguideireland.com/budget-2017-expect.html [Accessed on: 22 October 2016]. Revenue.ie. 2016. Definition of pay. [Online]. Available at: https://www.revenue.ie/en/business/paye/guide/employers-guide-paye-definition.html#section5 [Accessed on: 22 October 2016]. Revenue.ie. 2016. IT1 - Tax Credits, Reliefs and Rates for the Tax Years 2015 and 2016. [Online]. Available at: https://www.revenue.ie/en/tax/it/leaflets/it1.html [Accessed on: 22 October 2016]. Revenue.ie. 2016. Universal social charge. [Online]. Available at: https://www.revenue.ie/en/tax/usc/ [Accessed on: 22 October 2016].