Most households to pay more after freezing of tax credits and carbon hike, says ESRI
MOST households are facing a “real tax rise” after the Budget, a State-supported think-tank has found.
Finance Minister Paschal Donohoe’s decision to freeze tax bands and credits will cost people money.
They will also be hit by the carbon tax rise and the hike in cigarette duty, the Economic and Social Research Institute said.
Lower-income groups will be disproportionately hit by the rise in the carbon tax. The tax has already affected petrol and diesel prices, and is due to hit home-heating oil, natural gas, peat and coal prices from next May. A rise in the fuel allowance to compensate lower-income households for the carbon tax hike was announced. But the ESRI said less than half of the poorest households get this allowance.
However, consumers will also benefit from higher spending on public services.
Senior research officer with the think-tank Karina Doorley said households will be worse off in cash terms due to the freezing of the tax bands and tax credits. This is due to price rises eroding the value of tax credits and because pay rises will push people in to paying more income tax.
This is because more people will enter the tax net, while others will see more of their income taxed at the higher 40pc tax rate.
They will be hit by the decision not to widen the tax bands. The tax band refers to how income is taxed at 20pc. Any income above that is taxed at 40pc. A single person pays tax at the higher rate on income over €35,300.
And the minister did not alter the tax credits for PAYE workers. A tax credit is an amount you can earn before paying income tax.
Rising incomes means the decision not to widen the bands and increase the PAYE tax credit, which is known as indexing the tax system, will lead to more income tax being paid by workers.
A recent Dáil question asked by Fianna Fáil finance spokesman Michael McGrath revealed that holding off on indexing the tax system would yield an extra €600m in income tax for the Exchequer.
“An increase in the carbon tax, higher cigarette duty and cash freezes to the main tax credits and bands – a real tax rise – are the tax measures that will most affect households in 2020,” Dr Doorley said.
She said there were some households gaining from the Budget. The increase in the home-carer tax credit, for home-makers looking after a dependent, and the rise in the self-employed tax credit will see these groups benefit.