How Will Budget 2016 Affect Me? Here are some of the main issues from Ireland’s Budget 2016 (see an extended summary at the end of the short summary at the start):
- Confirmation that the pension levy has ended.
- Confirmation that the pension levy will not apply beyond 2015 and so the final payment is 0.15% applying at 30th of June 2015 values.
- Reduction in USC rates and bands will deliver additional net income of up to €900 pa
- Some USC bands have been increased and some rates reduced, meaning an increase in net income of up to €900 pa
- Increase in CAT Class A Threshold from €225k to €280k
- While welcome, Inheritance Tax liabilities are still significantly higher than in 2009.
- The Class B and C thresholds of €30,150 and €15,075 respectively have not been increased.
- No change in the CAT tax rate of 33%
- Introduction of an income tax credit for the self-employed & proprietary directors
- Proprietary directors and their spouses/civil partners have traditionally been denied the PAYE tax credit of €1,650, despite paying taxes under PAYE like other employees.
- A maximum €550 income tax credit for earned income is being introduced in 2016 for the self-employed and proprietary directors, equivalent to increasing the standard rate band for these taxpayers by €2,750.
- Reduced CGT rate of 20% to apply to the sale of businesses
- A reduced CGT rate of 20% is to apply from the 1st of January 2016 onwards on the sale in whole or in part of a business up to an overall limit of €1 million in chargeable gains.
- No change in pension tax relief limits
- Opportunity before Pay & File ROS deadline of the 12th of November (or 31st of October for others), to backdate personal pension contributions to 2014 and obtain tax relief at 41% (for higher rate taxpayers within the usual limits for 2014) instead of 40% in 2015.
- Increase in the State Pension of €3 per week
- This is the first increase since 2009. Brings the maximum State Contributory Pension to €233.30 pw or €12,132 pa.
- No change in DIRT, exit tax or CGT tax rates
- No change announced in DIRT or exit tax rates, which remain at 41%, or in the standard Capital Gains Tax rate of 33%.
Budget 2016 headlines in some more detail:
Pension levy ends in 2015
The Minister has confirmed that the much disliked pension levy ends this year with the final 0.15% levy applying at 30th of June 2015 values. No levy will apply from 2016 onwards.
Reduction in USC rates and bands
The standard USC rates and bands(1) have been reduced as follows:
The change in USC bands and rates shows the following difference in USC liability as between 2015 and 2016 at different levels of gross income:
Sole traders and partners in a partnership who have income in excess of €100,000 pay additional (to the 8% rate above) USC of 3.0% on such income in excess of €100,000; this continues for 2016.
The 3.5% rate currently applying to the over 70’s with income of less than €60,000 is reduced to 3.0%.
(1) For an individual under age 70 who does not hold a Medical Card.
Increased CAT Threshold
The current Class A Threshold limit (which applies to inheritances taken by child from a parent) of €225,000 is increased to €280,000 with effect from the 14th of October 2014. However there is no change in the Class B and C Thresholds of €30,150 and €15,075.
While the increase in the Class A Threshold is welcome, Inheritance Tax liabilities are still substantially higher than back in 2009, due to a combination of an increase in the tax rate and reduction in the Thresholds. Consider the Inheritance Tax liability on an inheritance of €500,000 by a child from a parent, assuming the full Class A Threshold is available to the child:
Introduction of an Earned Income Tax Credit for the self-employed and proprietary directors
Proprietary directors, and their working spouses/civil partners, have traditionally been discriminated against because although they paid their income tax under PAYE like everyone else, they could not claim the PAYE tax credit of €1,650 available to all others paying income tax under PAYE.
From 2016, the self-employed and working proprietary directors and their working spouses/civil partners will be entitled to a €550 income tax credit against income tax on their earned income. The effect of this is similar to an increase in the standard rate band of €2,750.
In the case of a family company the tax credit will be available to each employee who is not entitled currently to the normal PAYE tax credit, so that a husband and wife both working in the business and drawing Schedule E income from it, will each be entitled to a maximum €550 tax credit, if they have sufficient taxable income.
The tax credit may encourage more spouses/family members to work in family businesses, thereby increasing retirement funding potential.
An interesting side note; the tax credit will not reduce remuneration for pension funding purposes.
A reduced 20% CGT rate on the sale of a business
The Minister announced that a reduced CGT rate of 20% will apply from 1st January 2016 to the sale in whole or in part of a business up to an overall limit of €1 million in chargeable gains.
State Pensions increase by €3pw
The last increase in the State Pension was in 2009, 6 years ago. All State Pensions are to be increased by €3pw from 1st January 2016 onwards.
This will bring the maximum State Pension Contributory to €233.30 pw from its current €230.30 pw:
Child Benefit will also increase by €5 per month to €140 per month per child from 1st January 2016.
DIRT/exit tax & CGT rates unchanged
No change has been announced in relation to Deposit Interest Retention Tax (DIRT) or exit tax rates of 41%, or the standard rate of Capital Gains Tax of 33%.