Budget 2020 brought very limited changes from an employment and personal tax perspective. On the plus side, the Minister has decided to extend the Special Assignee Relief Programme (SARP) to 31 December 2022. However, it is disappointing that he has proceeded with the planned 0.1% Employer PRSI increase.
Without doubt, the most welcome announcement on Budget day was the extension to the Special Assignee Relief Programme (SARP). In its current iteration, SARP was due to expire for any new arrivals to Ireland after 31 December 2020. The extension to this relief follows a significant consultation process, driven by the Department of Finance, which took place earlier this year. The engagement of the wider business community, and ourselves on behalf of our clients, demonstrated just how vital this relief is towards continued investment in the Irish economy.
SARP is a crucial initiative required to help Ireland retain its attractiveness as a credible (and potentially alternative) location for foreign direct investment. The relief operates through reducing the top rate of income tax for certain highly skilled employees relocating to Ireland with their existing employer. In many cases such individuals are assigned to Ireland for short periods, to help embed new business processes or move part of a business to Ireland. Many other EU countries competing for foreign investment offer similar ex-pat tax regimes, for example The Netherlands. In our view, this relief is essential to ensure we don't lose out when investment decisions are being made. This is particularly relevant in the context of business units that may move from the UK to an alternative EU location post-Brexit.
The Minister announced the extension of the relief in its present format. It is also worth noting the results of the consultation process included many more recommendations. These included continuation of SARP to 2025 to provide certainty, consideration to be given to SARP for new hires in certain areas of skill shortages, and the recommendation for the refinement of claimant information provided by companies. It remains to be seen whether any of these recommendations will appear in the upcoming Finance Bill, or future budgets.
Although no changes were expected, Ireland's higher rates of income tax and social security remain at 52%. This means that Ireland has a high headline rate of personal tax compared to many other locations, many of whom we are competing against in the battle for foreign direct investment. Adding to the high tax rates is the level of income at which individuals enter these tax rates. In Ireland, income tax at 40% will begin to apply from €35,300 and USC at 8% from €70,044. In the UK perspective, the higher rate of 45% does not kick in until income reaches Stg£150,000.
The "across the board" adjustments to income tax bands and tax credits, which have formed part of more recent years' budgets, have not been replicated in Budget 2020. However, we did see an adjustment to the earned income credit, bringing this up to €1,500 which will be welcomed by the self-employed. This was introduced to deal with the anomaly, which currently exists between this credit and the employee PAYE tax credit, which remains at €1,650.
2020 will see the third and final instalment of the phased increase to the employer PRSI rate. The liability has gradually increased by 0.1% since January 2018 and from 1 January 2020 will be set at 11.05%.
The Minister announced an increase in the rate of Dividend Withholding Tax from 20% to 25%. This measure does not increase the underlying liability. In cases where the previous 20% withholding did not sufficiently cover the income tax due at the individual's marginal rates, the balance of tax became payable via self-assessment. If the 25% rate overstates the ultimate liability, this will result in a refund. The Minister also made reference to personalised rates of DWT being introduced from 1 January 2021, leveraging the technology available to Revenue from the introduction of PAYE modernisation this year. The exact details of this system, and whether this will result in more significant administration for companies, remains to be seen.
Pension auto-enrolment is due to commence in 2022 and is expected to apply to employees who are not currently members of an employer's private pension scheme. While this budget has not provided any greater clarity on exactly how this initiative will be introduced, companies should begin to plan for this inevitable roll-out. In particular, some businesses will need to budget for the increased cost of this initiative. For other companies, now may be a good time to consider how the income tax relief currently operates for members of private pension schemes, given the potential for this to change (potentially negatively) over the coming years.
In terms of other announcements in the employment tax space, before year-end we are expecting to receive an update to Revenue's approach to the taxation of Short Term Business Visitors (STBVs) to Ireland. As part of PwC's involvement in the representations through the professional bodies around this issue, we are expecting revised Revenue practice to be announced shortly and before year-end. In particular, Revenue has flagged their intention to revert to assessing STBVs on an individual tax year basis, as opposed to a rolling year basis. This would be a welcome move in providing greater clarity and reduced administration for employers.
Revenue had also previously signalled their intention to overhaul the tax treatment of employee expenses before 1 January 2020. This would be of significant importance to employers and employees alike. Please stay in touch with your PwC tax team as these initiatives evolve between now and year-end.
“Without doubt, the most welcome announcement on Budget day was the extension to the Special Assignee Relief Programme. The engagement of the wider business community, and ourselves on behalf of our clients, demonstrated just how vital this relief is towards continued investment in the Irish economy.”