What more can Budget 2024 do for individuals

I’ve previously written in these pages on Budget 2024 on lessening the income tax load on individual’s hard earned take home. For context, the recently published Summer Economic Statement explains that the overall budget package “will be composed of a spending allocation amounting to €5.2 billion in 2024. It notes that ‘Core’ expenditure will grow by 6.1 per cent in 2024. This adjustment to the Government’s expenditure framework takes into account the fact that inflation is expected to be above trend next year”.

It continued that “an overall taxation package amounting to €1.1 billion will be provided, once again focusing on the need to adjust income tax bands and credits so that workers are not ‘dragged’ into higher levels of taxation by virtue of wage inflation (‘fiscal drag’). In addition, €2.25 billion of ‘windfall’ corporate tax receipts will be made available over the period 2024 to 2026 to fund ‘windfall capital investment’. This form of capital investment will be contingent on ‘windfall’ receipts remaining at elevated levels”.

My previous column looked at measures such as the taxation of share options, the Key Employee Engagement Programme (KEEP), remote working as well as the potential introduction of a Personal Tax Roadmap. Just looking at the last one again; that would be something like a “tax policy priority to do list” which we can tick off each year and we’ve done that previously for Corporation Tax. Bottom line, we should seek to make Ireland the number one location for enhancing employment and economic activity. To achieve this, adopting a similar strategy approach for income tax would be a good move.

This is because knowing what is potentially coming our way brings some form of certainty to taxation; I say “some form” because there will always be those “unknown unknowns” that will come about and that we will have to react to; you don’t have to look that far back to see when the planet fell off its economic axis. The recovery would not have been what it was but for the economic supports brought about. As Mike Tyson famously said “Everyone has a plan until they get punched in the mouth”. That doesn’t mean that you shouldn’t plan ahead.

It's good that the Summer Economic Statement recognises the Budget will again focus on the need to adjust income tax bands and credits so that workers are not ‘dragged’ into higher levels of taxation by virtue of wage inflation. But what else can be done? Our firm’s pre-budget submission outlined some additional suggestions.

Regular readers of this column will know my view that when it comes to investment then simplicity eats complexity for breakfast every time. With three personal taxes (Income tax, USC and PRSI) that can apply to an individual’s hard earned cash, together with their different rates and reliefs, this creates a level of uncertainty and complexity in the tax system which isn’t helpful to employment or economic growth. Of the 600 plus appeals heard by the Tax Appeals Commission (TAC and a form of tax court) in the period from 2016-2022, and published on the TAC website, nearly half of them contain some element of personal taxes (be it income tax, PAYE, PRSI or USC). You only head into the TAC when you disagree with Revenue’s view on how much tax you owe. Therefore, this number serves to highlight the uncertain nature of this area in practice for taxpayers. Streamlining these taxes would provide a measure of clarity.

Any increases in either employee or employer PRSI will add to the cost for employers of employing people in Ireland. If an employer has a hiring budget, the cost of employer PRSI means that less employees may be hired. Accordingly, employer PRSI shouldn’t increase in future Budgets and future opportunities to reduce the cost of employments to employers should be considered. With a dozen different rates and a similar amount of classes, further divided into sub-classes, the PRSI system is complex and difficult for people to understand. Simplification would be a good move.

The Department of Finance recently held its seventh annual policy conference with the theme being “Future-proofing the Public Finances – the Next Steps”. Their document “Ireland’s public finances beyond the short-term: 10 facts” was published on the Department’s website. It explains at facts 7 and 8 that “Analysis by the Department of Finance suggests that age-related expenditure will be €7-8 billion higher by the end of this decade alone, relative to the beginning of the decade. Thereafter, these costs are set to increase exponentially, by 2070, ageing-related costs will account for 31.25 per cent of GNI*, an increase of 10.1 percentage points on the 2019 levels. The higher expenditure on healthcare, pensions and long-term care will have to be met by a relatively smaller working age cohort. Further the largest component of the projected increase in ageing-related costs is pensions. The estimated cumulative cost of keeping the State Pension age at 66 could be around €50 billion by 2070”.

Therefore now is the time to look again at individual savings. An individual can get an Income tax relief at the marginal rate against employment earnings in respect of pension contributions (including AVCs) to pension plans such as occupational pension schemes, PRSAs, RACs and qualifying overseas plans. This is subject to an age-related limit and a total earning limit. The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year. There are also age-related limits regarding a person’s deductible pension payments. For example, a person under 30 years of age can tax efficiently make pension contributions up 15% of their net relevant earnings. This increases proportionately to 40% to those aged 60 and over.

Therefore, we could look to increasing the limits for each age category or having a single maximum limit for all taxpayers. This would serve to promote pension savings encouraging more people to provide for a pension. We know we have an aging population with other demographic shifts.

We’re in a unique position right now so it’s appropriate and timely that we should be looking to saving for the future both individually and as a country. Tomorrow is a mystery so it’s up to every one of us not to make it history.

Please note this article first featured in the Business Post on Sunday 23 July 2023 and was re-published kindly with their permission on our website.