Last year, at this time, minister Lenihan predicted that 'the worst is over' and we 'have turned a corner'. In a very confident speech on 7 December 2010, he stated that Budget 2011 provides 'a new start' – most would say it is a pity that we need one. Clearly the corner turned in 2009 led us down the wrong road, a financial cul-desac of some sort.
The worst is coming in 2011 and beyond – in the form of the legislative changes and future policies announced in the Budget. Everything is ending: Charlie McCreevy's generous pension provisioning policies, long-perceived over-generous exemptions from tax on patent royalties, curtailment of artists exemptions, and, probably more widely felt, property tax reliefs. There is an end to or severe curtailment of over 25 tax reliefs/exemptions.
Financial resolutions
The Budget introduces an unprecedented amount of detailed change to our tax system and much of the work, normally reserved for the publication of the Finance Bill in the New Year, has been brought into force either immediately or with effect from 1 January 2011.
This has been achieved through the implementation of some 34 financial resolutions accompanying the Budget. Normally reserved for effecting changes immediately to excise duty on tobacco, these instruments have already been passed through the Dail to amend complex tax legislation.
The changes, as promised, will not leave any taxpayer untouched, and will create some new taxpayers – those who may previously have been exempt or fully sheltered from tax are now brought within the tax net.
Even at the lowest income level, a single person earning just €10,000 per year, will now pay €200 per year in tax instead of nothing, by virtue of the new Universal Social Charge (USC). At the higher end of earnings the reduction in net pay in 2011 as compared to 2010 will be around 5%. The details of tax rate and band changes are contained in our Budget 2011 leaflet*.
Notwithstanding the various changes in the Budget the marginal tax rate is retained at 52% for employees and the self-employed.
The Government spending and social welfare measures are to make up twothirds of the €6bn to be taken out of the economy in 2011, and tax measures just one-third. This commentary is limited to taxation measures.
Review of affairs
It remains our view that the tax system does still provide sufficient flexibility for many income earners to structure their affairs in a manner which can mitigate the effects of this and recent Budgets. For this reason, all such taxpayers should now re-examine the structuring of their business and investment assets. Cautious and sensible actions which may be taken by this group are likely to emerge from such a review.
A selection of the important changes which might impact on such a review include the following.
Pensions
- Reduction in maximum funding levels (€2.3m).
- Increased deemed distributions (3% to 5%) from post-retirement funds held in self administered pension schemes (i.e. more income tax).
- Reduced scope to provide for a pension generally in a tax relieved manner.
For those wishing to maximise 2010 pension provision opportunities, a pension fund payment ought to be made before 31 December 2010 (specific advice should be sought) rather than waiting
Tax-free termination payments
Restriction to €200K of maximum taxfree termination payment on cessation of employment/directorship. Restriction applies from 1 January 2011.
Property incentives
Full abolition of all incentive-type reliefs from 2014 (with some run-off provisions), with immediate severe restrictions from 1 January 2011. Any person with property incentives of any kind where these reliefs have not yet been used should seek detailed advice on these changes, and possibly seek to restructure investment assets as a result. The most disturbing vista for many investors has now been delivered. The nature of the restrictions, which will impact from 1 January 2011, is that individuals who paid expensively to avail themselves of Government-promoted tax reliefs have now been told that the very thing they paid for is to be taken away from them by those who effectively sold it to them in the first place.
Gift/inheritance taxes
- Reduction of tax-free threshold from €415K to €332K in relation to parental gifts to children from 8 December 2010.
- A similar 20% reduction for all other gifts.
- No changes to business property relief, which at least will give some breathing space to those who wish to transfer their business to the next generation. Our advice is to begin this process now where commercially sensible to do so.
Capital gains tax
Surprisingly CGT was not mentioned in the Budget. A case of 'the less said, the better' for the taxpayer. There are still some generous reliefs available in this area. Taxpayers should note, however, that the National Recovery Plan has signalled that rates will rise in 2012, so again it is a case of acting now.
Patent tax exemption
Removed with effect from 24 November 2010. This, along with artists exemption, was seen as overly generous for the times we are in, and few will argue.
Deposit interest
Increase of 2% from 25% to 27% (i.e. 8% increase in the tax liability on this income) for all deposit interest.
Interest relief
No further restriction of interest relief against rental income. However, there was an unexpected change in relief for any person who borrowed to acquire shares in a trading company, with a tapering off of the relief available starting in 2011 and ending in 2013. New loans from 8 December 2010 will not qualify for any relief.
Universal Social Charge
Surely to become known as the USC by all acronym-loving accountants. This replaces the Health and Income Levy and applies on a sliding scale to all taxpayers, reaching a top rate of 7% on income in excess of €16K. The USC will apply on a similar basis as the income levy, i.e. it will apply to income before deductions for many items including pension contributions.
Employee PRSI ceiling
The ceiling for employee PRSI has been removed; this has been threatened for many years and finally the time has come.
The pain of this for higher paid employees (above €75K per annum) has been offset by the USC burden being lower than its predecessor (Income and Health Levy combined).
The road to a healthy economy?
The size of the budgetary adjustment required in 2011 is such that every citizen will be affected by the announced taxation measures. While marginal tax rates have not been increased for employees and indeed have fallen for the self-employed, the reduction in credits and allowances and severe restrictions on pensions and other shelters means that the effective tax rate for many is set to increase substantially.
These measures may be necessary to bridge the fiscal deficit, however, the impact on the general health of the economy will not be known for some time, and indeed reduced levels of take-home pay may – as some economists contend – have a severe depressionary effect on the economy. The minister, on the other hand, would argue that these 'repairs' to the deficit should be viewed as an investment in our future economic well being; in his own words: "A substantial down payment on the journey back to economic health..."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.