Despite being planned under the shadow of Brexit, Budget 2020 has given most of us no financial cushion to absorb the higher prices and other financial challenges which we could face following the UK’s departure from the EU. The dearth of income tax and social welfare giveaways means many of us are no better off than in 2019. The carbon tax hike – which is already being felt by motorists – will hit many homeowners from next May, when the rise kicks in for home heating fuels.
Budget 2020 was cautious and unremarkable, with Finance Minister Paschal Donohoe ruling out tax cuts and any blanket social welfare increases – to safeguard against the threat of a no-deal Brexit. “In the event that a no-deal Brexit does not materialise, it would be hoped that the minister might consider reassessing the Budget measures and providing some relief to taxpayers,” said Alison McHugh, director of private clients with Deloitte.
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Budget 2020 has been described as the worst in years for working people. So how has it let you down – and what, if anything, can you, or indeed the Government, do about it?
YOUR TAKE-HOME PAY
Most workers will be no better off next year than they were in 2019 – due to Donohoe’s decision not to cut income tax rates or to increase the amount of money which people can earn before getting hit with the higher rate of income tax.
A PAYE worker who is single and earning €50,000 will therefore have the same take-home pay in 2020 as in 2019, according to KPMG.
A married couple who earn €80,000 and who have three children under the age of 10 will take home €68,314 after taxes next year, assuming both parents work, according to calculations by Aoife Crowley, senior tax consultant with Ernst & Young (EY). That €68,314, which includes child benefit payments, is the same amount of money taken home by the couple in 2019 – assuming the income earned in 2019 was also €80,000.
If one spouse in the couple is a stay-at-home parent, the family would only take home €61,979 next year – though this is €100 more than in 2019.
As was the case in 2019, single people (without children) will continue to get hit by the higher tax rate on earnings above €35,300. This means that those earning below the average wage are getting stung for the top tax rate.
“The Budget could be seen as a missed opportunity to address the impact of [the recession’s] austerity measures, which are still being felt today, in particular the fact that households on average incomes are still hitting the top marginal tax rate of 52pc at such an early stage,” said Pat O’Brien, executive director with EY. “Under Budget 2020, most people will not see any difference in their net pay – but may however notice the impact on their pocket of increased taxes on items such as energy.”
There were some tiny tax concessions – including a €100 increase in the home carer tax credit and a €150 rise in the tax credit for self-employed individuals. However, these will be of limited benefit and, indeed, many workers could see themselves paying more tax next year. “Given that personal tax credits and standard rate bands [which determine the rate you start to pay the higher rate of income tax at] have not changed, the modest increases to the tax credit for the self-employed and the home carer credit will not compensate for inflation in salaries, and therefore many self-employed and PAYE workers are likely to pay more tax in 2020 relative to 2019,” said Lauren Clabby, director at KPMG.
“Even modest increases to personal tax credits and standard rate bands would have helped reduce the level of tax increase.”
Budget 2020 has also let down highly skilled workers. “Highly skilled workers earning €100,000 or more are contributing 51pc of the total employment taxes collected by the Revenue Commissioners,” said Eamon O’Connor, tax manager with PwC. “Our income tax rates are high compared to our EU counterparts. Post-Brexit, the UK will be our closest competitor for highly skilled expats – but the UK income tax regime is significantly more competitive.
“The UK marginal tax rate for anyone earning up to £150,000 is only 42pc – increasing to 47pc over that. In Ireland, the marginal tax rate for individuals earning more than €35,300 is 48.5pc – or 52pc for those earning €70,000. If we want to continue to attract talent to Ireland, we need to become more competitive.”
In Ireland, high earners pay 14pc more tax than their average European counterparts, according to a study published by the international accountancy network, UHY International, this month.
It found that Ireland has the fifth highest tax burden of over 30 countries – and that the burden of taxes on workers is higher in Ireland than it is in the US, France, Australia, Poland and many other jurisdictions.
“The Irish Government has to be careful not to alienate high earners with an uncompetitive tax rate,” said Alan Farrelly, managing partner at UHY Farrelly Dawe White. “At the moment, high earners in Ireland take home 54pc of their pay compared to 59pc on average among other European countries. That is a noticeable difference that could create a long-term challenge to our aim of attracting high-paid jobs in areas like financial services and technology.”
Workers have little choice but to swallow the lack of tax cuts in Budget 2020. One way that workers could ease their disappointment is to be sure to claim all the tax reliefs and credits which they are entitled to – as this could put thousands back into their pockets. Workers should also start to set money aside – and learn to be more frugal with their finances -in a bid to offset the financial challenges of a no-deal Brexit.
The carbon tax increase will apply to home heating oil, natural gas bills and other fuels (such as coal, briquettes and peat) from May. It will push up the cost of filling a 900-litre tank of kerosene by about €15. From May 2020, the tax will add around €61 to the annual gas bill – based on average usage, according to bonkers.ie. Currently, the carbon tax adds around €46.20 a year.
As it’s the first of 10 planned annual rises, those who rely on home heating oil, natural gas, coal, briquettes or peat should take steps to reduce the amount of fuel they use.
This could include insulating their home, installing solar panels, or taking other simple steps around their home to stop wasting energy.
Budget 2020 has put more money in the pot to support the installation of solar panels on homes. It has also put €13m into the Warmer Homes scheme. The scheme provides free energy efficiency upgrades to households who cannot – or who are at risk of not being able to – afford their energy bills. Be sure to take full advantage of any State grants available to help you make your home energy-efficient.
Additional funding will be made available to businesses particularly vulnerable to a no-deal Brexit – such as the food and agri sector – by way of grants, loans and equity investment. Budget 2020 also had some good news for small businesses, including a bigger tax credit for research and development (R&D) and improvements to the Employment and Investment Incentive (EII) scheme – which offers tax breaks to those who invest in certain small businesses.
However, much more could have been done to support small businesses and entrepreneurs.
“The lack of any improvement to entrepreneur relief from capital gains tax (CGT) is again disappointing,” said McHugh. “With a longer-term economic focus in mind, we need to incentivise business owners to retain and scale up their businesses with the prospect of a tax-efficient exit.” CGT entrepreneur relief, which was introduced in 2016 to encourage and reward those who take risks which benefit the economy, gives tax breaks to entrepreneurs when they sell up. Under this tax break, there is a lifetime limit of €1m on the gains that an entrepreneur can claim relief on. In his Budget speech, Donohoe said he had asked his department to consider the outcome of a recent review into CGT entrepreneur relief – to determine any changes which could be made to the tax break to better support entrepreneurs and entrepreneurial activity.
That review recommended a number of changes to the relief to help it work better – including an increase in the lifetime cap of €1m. None of these recommendations was acted on in Budget 2020.
“We would like to see the lifetime threshold increased from €1m to €10m to bring it in line with the UK equivalent relief,” said McHugh.
“Alternatively, the minister could consider a level of tapered relief, depending on the number of years the shares [in the company] have been held. This would encourage entrepreneurs to stay in [the company] for longer – to grow and scale their business.”
O’Connor agrees: “CGT entrepreneur relief is a key relief to encourage individuals to start up businesses in Ireland, and so improvements to this regime could prove a significant incentive to people considering setting up a business here.”
Budget 2020 included some improvements to the Key Employee Engagement Programme (KEEP) – which helps small businesses to recruit and retain key staff through the award of share options, without triggering a large tax bill for the employee. “However, in reality, most small business owners are not in a position to offer KEEP to their employees,” said McHugh.
“A significant number of small businesses are family-owned businesses, which tend to keep ownership within the bloodline – thus they would not reward key management or employees by giving them an equity stake.”
The increase in the tax credit for the self-employed from €1,350 to €1,500 will lower the tax bill faced by self-employed individuals next year – however, more could have been done to even the tax playing field, according to O’Connor. “Self-employed individuals continue to bear a higher tax burden [than employees], with this Budget taking small steps towards closing this inequity,” said O’Connor.
“Parity could have been achieved by increasing the earned income credit to €1,650 – to bring it in line with the employee tax credit. More significant is the continued inequity between marginal [higher] tax rates, with self-employed individuals remaining subject to an additional 3pc tax charge on incomes above €100,000.”
By contrast, employees who earn more than €100,000 a year are not hit by that surcharge.
Farmers and rural communities will be disappointed with the increase in carbon taxes having an immediate impact on diesel costs, according to O’Connor. “There is very little that farmers and rural communities can do to limit the financial impact of these changes, as appropriate infrastructure is not yet in place,” he said.
Although Budget 2020 included a number of measures to protect farmers in a no-deal Brexit, the increase in commercial stamp duty will have put many farmers out. “The farming community have been lobbying for agricultural property to be treated differently than commercial property for stamp duty purposes,” said O’Connor. “Not only did Budget 2020 not address this concern, but it has increased stamp duty on commercial property from 6pc to 7.5pc. Farmers will be hoping the upcoming Finance Bill will seek to exclude agricultural land from the definition of commercial property, so that agricultural land does not fall subject to the 7.5pc rate of stamp duty.”
The rate of tax paid on savings interest – DIRT – will fall from 35pc to 33pc next year. Given the paltry interest rates being paid on savings today, this reduction will be of limited benefit.
“Savers who were forced away from traditional savings accounts due to low interest rates had hoped that the exit tax on certain investments, which is currently levied at 41pc, would be reduced to be in line with DIRT,” said Clabby. “This has not happened in Budget 2020.”
While anyone who has made the jump from traditional accounts to investments should be very careful to choose an option which has a good chance of beating the tiny returns made on most savings accounts, the Government’s decision to leave the 41pc rate of exit tax on certain investments unchanged makes it even more important for investors to do so – which is no easy feat.
YOUR RENTAL PROPERTY
Budget 2020 did nothing to ease the high tax bills crippling many small individual landlords. “Although there is often a picture painted of rich landlords charging exorbitant rents, the reality for a lot of landlords is that their properties have not recovered from the negative equity suffered during the downturn,” said Deloitte’s Alison McHugh.
Such landlords often have little choice but to hold on to those properties – until they emerge out of negative equity. “In the meantime, these landlords are paying high levels of income tax, universal social charge (USC) and PRSI on rental ‘profit’ – which is in reality only a paper profit, as the rental income is often not sufficient to meet the expenses arising on the property,” said McHugh. “To help ease this burden, we would like to see relief being available for local property taxes payable on rented properties.”
Deloitte also believes that individual landlords should be able to get relief from USC when claiming capital allowances against their rental income. Currently, individual landlords can claim certain capital expenses against their rental income to reduce the amount of income tax and PRSI they pay.
However, landlords cannot claim relief from USC when claiming capital expenses against their rental income – USC is charged on the amount of rental income received before a landlord deducts capital allowances.
Budget 2020 did extend the Living City Initiative (which offers tax relief to owner-occupiers and landlords who incur costs refurbishing or converting residential properties in certain areas) until 2022. But many won’t own homes which qualify for it.
If you’re a landlord struggling with high tax bills on rental income, write as much eligible expense off your tax bill as you can – and fully claim mortgage interest relief on your investment property.
There was no increase in the weekly state pension and a puny €2 increase in the weekly fuel allowance (which is paid during the cold months to people who are dependent on long-term social welfare payments, and who are unable to provide for their own heating needs).
Many pensions will be in line for the €5 increase in the living alone allowance – which is paid to pensioners and people with disabilities who live alone – though it’s a small increase. “Pensioners would have been aided by a general increase in the weekly state pension to help combat increases in the cost of living,” said Eamon O’Connor, tax manager with PwC.
“Pensions have seen a moderate but steady increase in recent Budgets, and many pensioners will be disappointed that this trend has not continued.”
An increase in the income tax exemption limit for those aged 65 or over would have helped pensioners, according to Robert Dowley, partner with KPMG.
Under that exemption, people aged 65 or above can receive income of up to €18,000 a year without paying income tax, in the case of a single individual, or €36,000 in the case of a couple.
“For an elderly individual with relatively modest rental income or a pension from their former employment, inflationary increases to their pensions can have the effect of disproportionately increasing the level of income tax payable in certain instances,” said Dowley. “Such an individual would have benefited from increases to either the exemption limits or to personal tax credits or tax rate bands.”
Budget 2020 should help to ease the medical bills faced by many pensioners. There will be an extra 56,000 medical cards for those over 70, a small cut in prescription charges, and the monthly threshold for the Drug Payment Scheme (DPS) will fall from €124 to €114 from January 2020.
As the DPS limits the amount that an individual or family will pay for approved prescribed drugs and medicines each month, it is invaluable for those who continually face high medical bills.
However, the upcoming monthly limit of €114 will still be a far cry from the €90 monthly cap which applied about 10 years ago – so there is still room for improvement here.
There was little to ease the plight faced by those paying runaway rents. An extra €2m has been given to the Residential Tenancies Board to allow it to recruit more staff – and to help it enforce rental laws and rent controls. Extra money has also been given to local authorities so they can inspect the quality of rented properties.
However, there was no sign of a reintroduction of the rental tax credit. This credit, which gave tax relief to those who paid for private accommodation, ended on December 31, 2017. A reintroduction of that credit could have helped to ease the burden of high rental bills on tenants – and put money back into their pockets to save for a home.
“While a range of social housing initiatives were announced, they are unlikely to be of assistance to dual-income households, where both are middle-income earners,” said KPMG’s Lauren Clabby. “The reintroduction of a rent tax credit could have assisted those taxpayers, but this did not happen in Budget 2020.”
YOUR FIRST HOME
Under Budget 2020, the Help-to-Buy scheme – which allows first-time buyers to get a tax rebate of up to €20,000 – has been extended for another two years. Although that €20,000 can be a big help when getting the deposit together for a home, many first-time buyers don’t qualify for the relief – because they’re buying a second-hand home. “To qualify for the relief, a first-time buyer must either buy or build a new property,” said McHugh. “It would have been good to see the Government extend this relief to first-time buyers who are buying a second-hand property, in order to allow more people to avail of the relief when starting off as a homeowner.”
Given that such a concession wasn’t made in Budget 2020, first-time buyers must continue to exclude second-hand homes from their property search – if their only hope of getting the deposit together for a home is with the aid of the Help-to-Buy scheme. For those first-time buyers who prefer second-hand homes, or who would have a better chance of getting on to the property ladder by buying second-hand, their only options are to save up the deposit themselves or to get a dig out from parents (if, of course, they can).
The Budget increased the value of gifts or inheritances which children can get tax-free from their parents over their lifetime by €15,000 – to €335,000. “While this increase is welcome, it does not go far enough to ease the tax burden for children inheriting assets from their parents,” said Deloitte’s Alison McHugh.
The average asking price for a home in Dublin is €376,000, according to the latest house price report from the property website myhome.ie. Furthermore, the asking price for above-average properties in Dublin – and indeed some other parts of the country – is often much higher than €376,000. So as €335,000 is the maximum that a child can inherit tax-free from his parents, many children will still face a tax bill when they inherit the family home.
Changes in inheritance tax rules since 2009 have substantially increased the tax bills which children and others face when they inherit something – and Budget 2020 hasn’t done much to reverse that.
In early 2009, a child could inherit up to €542,544 tax-free from his parents over his lifetime – compared with €335,000 today. The rate of inheritance tax charged in early 2009 was 22pc – today, the rate charged is 33pc. “In January 2009, a child who inherited a property from their parents worth €550,000 would pay little over €1,500 in inheritance tax; today that same child would have an inheritance tax liability of over €70,000,” said McHugh.
“It is disappointing that the 33pc inheritance tax rate has not been reduced to bring it closer to the 20pc rate applying up until November 2008.”
Budget 2020 has not done anything to make it easier for brothers, sisters, nephews and nieces to inherit a valuable asset – without being left with a crippling inheritance tax bill which could force them to sell that asset.
Last Tuesday’s Budget did not increase the amount which can be inherited tax-free by such relatives. The most that a brother, sister, nephew or niece can inherit tax-free is €32,500; the most that any other individual (such as a relative-in-law or friend) can inherit tax-free is €16,250.
It’s been almost nine years since the tax-free thresholds (which determine the amount which can be inherited tax-free) were changed for brothers, sisters, nephews or nieces, and relatives-in-law.
The current thresholds often make it impossible for such relatives to inherit an old family home or other property – without having to sell it for the purpose of settling an inheritance tax bill.
So anyone who plans to leave an inheritance to a relative (whether it be a child or another relative), relative-in-law or friend needs to be very careful about doing so – to avoid triggering a major tax bill for the disponee. A will should be made to help ensure an estate is distributed as tax-efficiently as possible. It may also be worth buying a life insurance policy to cover future inheritance tax bills.
From this January, drivers will be hit with a tax on new cars and used imports based on nitrogen oxide emissions. This tax will replace the diesel surcharge introduced in Budget 2019. The higher carbon tax on petrol and diesel – which kicked in from midnight last Tuesday – has added about €1 to a 50-litre tank fill. “This will have a particular impact on commuters and those living in rural areas,” said Robert Dowley, partner with KPMG. “For workers who commute long distances, diesel remains the car of choice.”
Drivers can limit the impact by buying an electric or plug-in hybrid car. However, this may not be practical for many.
“While additional funding has been provided in the Budget for the purpose of increasing the number of local authority street charging points and communal charging points at apartment blocks, this is of limited benefit to long-distance commuters, given the relatively short range which electric cars tend to have and also the cost of purchasing the car,” said Dowley. “Concessions from carbon tax for commuters – such as a rebate scheme – could have reduced the immediate impact on commuters.”
There had been hopes that Budget 2020 would include a scrappage scheme – to make it easier for motorists to make the switch from petrol or diesel to electric cars. Instead, it provided €8m to maintain the grants available to individuals buying electric and plug-in hybrids. However, grants (worth up to €5,000) are only for those buying new cars. VRT relief on such cars – which is worth up to €5,000 – has been extended until the end of 2020 (apart from those with carbon dioxide emissions above certain levels). However, even with the grant and VRT relief, a new electric or plug-in hybrid car is beyond the reach of many.
Back in 2010, the Government introduced a car scrappage scheme -which allowed people to get €1,500 off the price of a new car if they scrapped their old one that year. Combined with deals offered by some motor dealers, drivers knocked as much as €4,000 off the price of a new car. If the Government is serious about encouraging the switch to electric, a State scrappage scheme may be needed, along with the grants and VRT relief for electric cars.
In the meantime, owners of petrol or diesel cars should examine ways to limit the impact of the carbon tax – and those to follow. Options could include cutting out unnecessary journeys, using public transport more (where possible), joining a car pooling/sharing scheme, or taking up the School Transport Scheme (if you have eligible children). Also, as the cost of owning a petrol or diesel car will become increasingly prohibitive, start saving regularly now for an electric car in the future.
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