Brian Lenihan, Minister for Finance, stated last December that he believed the worst was over and that the 2010 Budget was the last big push of the Irish crisis, how wrong could he have been!
For the second year in a row we have received a savage Budget. As expected the vast majority of changes proposed in the National Recovery Plan 2011-2014 have been included in the 2011 Budget.
In a measure to widen the tax base the Minister has reduced tax credits and standard income tax bands by 10% whilst also introducing a new Universal Social Charge which is to replace the current Health Levy and Income Levy taxes. As expected a number of reliefs have either been abolished or restricted.
A summary of the main proposed changes is as follows:
Tax on Savings
Deposit Interest Retention Tax (DIRT) on deposits is to increase to 27%.
• 10% reduction in Tax Credits from 1 January 2011
Example: Employee tax credit and single person tax credit are to be reduced
by €180 to €1,650
• 10% reduction in Standard Rate Bands from 1 January 2011
• New Universal Social Charge (USC) rate to be introduced which will replace
the health levy and income levy. The proposed thresholds are as follows:
0% < €4,004
2% €0 to €10,036
4% €10,037 to €16,016
7% > €16,016
Abolition of Income Tax Reliefs:
- Rent Relief to be phased out over 8 years; the same timeline as previously
announced for Mortgage Interest Relief.
- Patent Royalty Exemption, effective from the launch of the National Recovery
Plan on 24 November 2010.
- Tax relief on Loans to Acquire an Interest in Certain Companies.
- Abolition of tax relief for Trade Union Subscriptions.
- Tax exemption from BIK for Employer Provided Childcare.
- Abolition of tax relief on subscriptions to professional bodies.
- Tax relief for new shares purchased by employees.
Restriction of Income Tax Reliefs
- Restriction of the tax-free element of ex-gratia termination payments to
€200,000 so that payments above this amount will be subject to tax at the
marginal rate. This change will apply with effect from 1 January 2011.
- €40,000 will be the maximum tax free earnings for artists under the Artists
- PRSI and USC to be charged on:
Approved Profit Sharing Schemes
Approved Save-As-You-Earn Schemes
Unapproved Share Options
- Restriction of Section 23-type reliefs
• Abolition of the employees PRSI ceiling of €75,036 above which no PRSI was
• Class S (Self-Employed) PRSI rate increased from 3% to 4%.
• Introduction of a 4% PRSI charge for certain Office Holders.
• No proposed changes in 2011.
• Purchase of residential property
Reduction in stamp duty payable on residential property to 1% on properties valued up to €1 million, with 2% applying to amounts over €1 million, in respect of transactions executed on or after 8 December 2010;
Abolition of various stamp duty reliefs and exemptions, in respect of transactions executed on or after 8 December 2010, as follows:
First time buyer relief
Exemption for new houses under 125 sq m in size
Relief on new houses over 125 sq m in size
Consanguinity relief for residential property transfers
Exemption for residential property transfers valued under €127,000
Site to child relief
Capital Gains Tax (CGT)
• No proposed changes.
Relevant Contracts Tax
• Replacement of the current RCT rate of 35% with a two-rate withholding system on a revenue neutral basis:
o 20% rate for subcontractors registered for tax with an established compliance record;
o 35% rate for subcontractors not registered for tax;
• Increase in Mineral Oil Tax on Petrol and Auto-diesel
The mineral oil tax will be increased by 4 cent per litre on petrol and 2 cent per litre on auto-diesel (both inclusive of VAT) with effect from midnight on 7 December 2010.
• Amending the Air Travel Tax to a single rate of €3
A single revised rate of Air Travel Tax of €3 will come into effect on 1 March 2011, on a temporary basis.
• Vehicle Registration Tax (VRT)
The following package of measures will be introduced:
Extension of the Car Scrappage Scheme to mid 2011
Extension of VRT relief for Hybrid Vehicles and Flexible Fuel Vehicles
Increase in the VRT flat-rate for Commercial (Category C) vehicles
• Employee PRSI on pension contributions
From 1 January 2011, employee contributions to occupational pension schemes and other pension arrangements will be subject to employee PRSI and the Universal Social Charge. The PRSI change will be legislated for in the Social Welfare Bill.
• Employer PRSI on pension contributions
The current employer PRSI exemption for employee contributions to occupational pension schemes and other pension arrangements will be reduced by 50% from 1 January 2011. The change will be legislated for in the Social Welfare Bill.
• Contribution limit
The annual earnings limit which (along with age-related percentage limits) determines the maximum tax-relievable contributions for pension purposes is being reduced from €150,000 (2010) to €115,000 for 2011. The annual earnings limit for the year of assessment 2010 will also be deemed to be €115,000 for the purpose of determining how much of a pension contribution paid by an individual in the year of assessment 2011 will be treated as paid in 2010, where the individual elects under existing rules to have it so treated.
• Maximum allowable pension funds
The maximum allowable pension fund on retirement for tax purposes (known as the Standard Fund Threshold (SFT)), is to be set reduced to €2.3 million with effect from 7 December 2010 from its current value of €5.4 million.
• Approved Retirement Funds
The annual imputed distribution which applies to the value of assets in an Approved Retirement Fund (ARF) at 31 December each year is being increased from 3% to 5% in respect of asset values at 31 December 2010 and future years.
• Retirement lump sums
The well leaked cap on pension tax free lump sums has been introduced. The overall life-time limit on the amount of tax-free retirement lump sums that an individual can draw down from pension arrangements is being reduced to €200,000. The excess of this amount will be taxed at the standard income tax rate (currently 20%) up to an amount equal to 25% of the new Standard Fund Threshold (up to €575,000). The excess of retirement lump sum payments over that amount will be taxed at the taxpayer’s marginal rate of income tax.
These changes take effect from 1 January 2011.
• 3 Year Tax Exemption for Start-up Companies
This scheme is being extended to include start-up companies which commence a new trade in 2011. The scheme is being modified so that the value of the relief will be linked to the amount of employers’ PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee. If the amount of qualifying employers’ PRSI is lower than the reduction in corporation tax liability otherwise applicable, relief will be based on the lower amount.
• 12.5% corporation tax rate on trading activities to remain unchanged.
• Energy-efficient equipment
The scheme of accelerated capital allowances for expenditure by companies on certain energy-efficient equipment is being extended for a further 3 years to end- 2014.
Capital Acquisitions Tax
The current group tax free thresholds are being reduced by 20%. This reduction applies in respect of gifts or inheritances taken from midnight on 7 December 2010.
Please note the above list is not an exhaustive list of proposed changes. In addition, the above notes are based on the budget speech and not on draft legislation, which will not be available until the Finance Bill is published. Fenero accepts no responsibility for any action which any individual or business may take or not take based on their reading of this fact sheet. Professional advice should be taken before any action is taken.