HOW TO MAKE BUDGET 2020 WORK FOR YOU

It’s been described as the worst Budget in years for workers — and rightly so, writes Louise McBride

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.

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.

YOUR HEATING

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.

YOUR BUSINESS

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 selfemployed 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.

YOUR FARM

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.”

INVESTMENTS

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.