The Minister re-emphasised the importance of broadening the tax base for individuals. The measures outlined in Budget 2011 will increase the numbers paying tax and further restrict income tax reliefs in a bid to achieve this objective.
While the headline income tax rates remain unchanged, the Minister announced a reduction in personal tax credits and the standard rate bands of up to 10 per cent, effective from 1 January 2011. Personal tax credits have been reduced by €180 for a single person and €360 for a married couple. The employee tax credit was also reduced by €180. The impact of these reductions means that a single worker will now enter the income tax net at an income level of €16,500 (€18,300 in 2010 ). Such an individual will start paying income tax at the higher rate of 41 per cent once their income exceeds €32,800 (€36,400 in 2010 ). There have been similar decreases in standard rate bands for married couples with one or two incomes with the bands decreasing to €41,800 (previously €45,400 ) and €65,600 (previously €72,800 ) respectively. These decreases will result in an additional 132,200 individuals who were previously exempt from income tax becoming liable in 2011. An additional 84,100 taxpayers will be liable to the higher rate of 41 per cent.
Other tax credits such as one parent family, home carer, widowed parent and incapacitated child also face similar decreases of approximately 10 per cent from 1 January 2011. Age credits and tax exemptions available to individuals over 65 years will be abolished over four years.
The Minister announced that the employee PRSI ceiling of €75,036 will be abolished with effect from 1 January 2011. Self employed individuals will be liable to an increased rate of PRSI of 4 per cent (previously 3 per cent ). Public servants who are subject to modified PRSI rates will, from 2011, be subject to PRSI of 4 per cent on incomes in excess of €75,036.
Universal Social Charge
The Minister outlined the introduction of a new Universal Social Charge as a replacement for both the Health Contribution and the Income Levy with effect from 1 January 2011. Individuals with income of less than €4,004 will be exempted from the new charge. Progressive rates of between two per cent and 7 per cent will apply depending on income levels, with the seven per cent rate applying to income in excess of €16,016. A reduced rate of Universal Social Charge of four per cent will apply to persons over 70. The charge will be applied to gross income in a similar manner to the Income Levy.
As anticipated following the recently published National Recovery Plan, Budget 2011 introduced a number of changes to the tax relief available for pension contributions. From 1 January 2011, employee contributions will no longer be exempted from employee PRSI and the Universal Social Charge (previously Health Contribution and Income Levy ). In addition, the current employer PRSI exemption for employee contributions will be reduced by 50 per cent.
The annual earnings cap which determines the maximum annual tax deductible pension contributions by employees and self-employed individuals will be reduced from €150,000 to €115,000 for 2011. The reduced cap will also apply where individuals elect to have contributions paid in 2011 treated as having been paid in 2010 for tax relief purposes.
The Minister also announced a €200,000 lifetime ceiling for tax-free pension lump sum payments. The first €375,000 of such lump sums over that limit will be taxed at the standard rate (20 per cent ). Any excess over the aggregate amount of €575,000 will be taxed at the marginal rate.
Minister Lenihan made a welcome announcement that pension payments to those over 65 years will not be reduced in this Budget. Unfortunately, the same cannot be said for other social welfare payments. Child Benefit will be reduced by €10 per month from January 2011 with an additional €10 per month decrease for the third child only. In general, all other weekly schemes will be reduced by €8 per week. This will reduce the basic rate of unemployment benefits to €188. However, the reduced rates of payment of Jobseekers Allowance for those aged 18-21 is unchanged and for those aged 22-24, there will be a decrease of €6 per week to €144.
In a departure from this Budget’s trend, the Minister announced a new relief to encourage individuals to make their homes more energy efficient. Relief will be given on maximum qualifying expenditure of €10,000 at the standard rate of income tax.
As announced in the National Recovery Plan, with effect from 1 January 2011, PRSI and Universal Social Charge (previously Health Contribution and Income Levy ) will apply to:
• Approved Profit Sharing Schemes
• Approved Save As You Earn Schemes
• Unapproved Share Options
• Share awards
In a move likely to be welcomed by the corporate sector, the Minister reiterated the Government’s commitment to the 12.5 per cent corporation tax rate.
Recognising the importance of small and medium sized businesses to Ireland’s economy, the Minister announced two important changes to existing tax reliefs. Firstly, he extended the three-year corporate tax exemption for start-up companies commencing to trade in 2011 with an annual corporation tax liability of €40,000 or less (subject to marginal relief where the corporation tax liability is between €40,000 and €60,000 ). The benefit of the scheme will be capped at the employer’s PRSI liability for the period, subject to a maximum of €5,000 per employee. Also the existing Business Expansion Scheme tax relief will be replaced by a new Employment and Investment Incentive Scheme which will be linked to employment numbers. The reformed scheme will enable businesses to raise up to €10 million in funding (previously €2 million ) and will be subject to a simpler certification process to its predecessor.
In another green incentive by this Government, the scheme of accelerated capital allowances for expenditure on certain energy efficient equipment will be extended to 2014.
In a bid to encourage further tax compliance within the construction industry, the Minister announced a reform of the Relevant Contracts Tax regime. The existing withholding rate of 35 per cent rate will be reduced to 20 per cent for registered subcontractors with an established compliance record. The 35 per cent rate will continue to apply for subcontractors who do not satisfy these requirements. Further measures, including replacement of the monthly repayment system with an offset system and new anti-fraud measures, will also be implemented.
Abolition of Tax Reliefs
The Minister reaffirmed the Government’s commitment to abolishing and restricting tax reliefs. In his speech, the Minister confirmed that rent relief will be phased out by 2018. As previously confirmed by the Department of Finance, tax exemption for patent royalties and patent royalty dividends has been abolished with effect from 2pm on November 24 2010. A number of other income tax reliefs will be modified/abolished from January 1 2011 including:
• Tax free ex-gratia redundancy payments will be capped at €200,000
• Artist exemption will be capped at €40,000 per annum
• Tax relief for trade union subscriptions will be abolished
• Tax relief for subscriptions to professional bodies will be abolished
• Tax relief for loans to acquire shares in certain companies will be abolished over a three year period
• The benefit in kind exemption for certain employer provided childcare will be abolished
The National Recovery Plan suggested that existing property tax reliefs would be further restricted in this year’s Budget. One such measure announced in the Budget which is likely to impact on many investors is the significant restrictions in relation to Section 23 relief. From 2011, the Section 23 relief on each property will be limited to the income from that property. Any unused relief at the earlier of the end of 2014 or the required 10 year holding period will be lost. In addition, if the property is sold within the 10 year holding period, the new owner will not get any tax relief and the seller will still suffer a clawback. Similar restrictions will apply for other property based capital allowances for passive investors.
There was some good news for farmers. The existing 35 per cent stock relief and the special incentive stock relief of 100 per cent for certain young trained farmers will be extended for a further 2 years. However, in line with underlying objective of this year’s Budget, the scheme of accelerated allowances for capital expenditure on farm buildings and structures for use in the control of pollution will be terminated. It would appear from the Department of Finance Budget publications that farming stamp duty reliefs will not be impacted by this Budget.
Other Tax Matters
We have set out below some of the other highlights of this year’s Budget:
The rate of Capital Acquisitions Tax remains unchanged at 25 per cent. However, the tax free thresholds are reduced by 20 per cent with effect from midnight December 7 2010. For example, the tax free threshold applying to a gift or inheritance received by a child from their parent will be reduced to €332,084 (previously €414,799 ).
The Minister introduced a one per cent flat rate of Stamp Duty for transfers of residential properties valued up to €1 million and two per cent on any amounts over €1 million. All existing residential property Stamp Duty exemptions and reliefs have been abolished including first time buyer relief, blood relative relief, site to child relief etc. These changes are effective from December 8 2010 but as a measure of relief contracts which have already been signed and will be completed before July 1 2011 will not lose out.
All rates of Deposit Interest Retention Tax (“DIRT” ) will rise by two per cent with effect from January 1 2011.
The recently introduced Air Travel Tax will be temporarily reduced to a €3 flat rate per departure (current rates €2/€10 ) with effect from 1 March 2011. The Minister indicated that the extension of this reduced rate beyond 2011 will be dependent on airlines’ response to the reduction.
This article was compiled by Caoimhe McLoughlin, Nora Cosgrove and the KPMG Galway Tax team , Odeon House, Eyre Square, Galway. Tel: 091 534600.