Key personal tax and employment tax matters include the following:
- A reduction to personal tax burdens through either increases to tax bands and credits or the introduction of a 30% tax rate, albeit the latter is now looking unlikely. Clarity is also needed on whether formal indexation of the personal tax system will be introduced on a mandatory basis—now, or in the future.
- PRSI rates for employees, employers and the self-employed remain in the spotlight. While not popular, incremental increases may be on the cards to support the Social Insurance Fund.
- An extension to the Special Assignee Relief Programme (SARP) and the Key Employee Engagement Programme (KEEP) would be welcomed by businesses as a means of attracting and retaining talent.
- Reforms to the application of the Small Benefit Exemption would give employers further scope to reward employees in a tax-efficient manner.
Income tax changes
Budget 2023 comes at a time when the Government is under significant pressure to tackle the cost of living crisis.
Initial indications from the Government are that significant tax cuts are very much on the cards as a means of helping people with rising costs. While proposals for a new intermediate 30% rate of income tax seem to have lost some of their lustre over concerns about fairness, significant structural change and the impact on marginal tax reliefs, the focus is now on indexation to help protect against ‘bracket creep’.
The Tax Strategy Group (TSG) estimates that the total cost of indexing the tax system at a rate of 4% (which is well below the rate of inflation) would be in the region of €845 million. Such a measure would significantly eat into the €1 billion fund, leaving limited room for further tax measures.
There have been calls from many lobby groups for a reduction in employer PRSI as a direct cost-saving measure for businesses. However, the deficit in the Social Insurance Fund and increasing demographic concerns mean such requests may not be part of the Government's plan. At the heart of the TSG’s comments on PRSI is the issue of funding for future State pension entitlements. The group noted that in 1991, there were five working-age people to one pensioner. This is anticipated to fall to 2.3 working-age people to one pensioner by 2050. Against this backdrop, the pre-Budget paper considers:
- Increasing PRSI, currently 11.05% payable by employers, to a standard rate of 12.55% over a multi-year timeframe;
- Increasing the current employee contribution rate of 4%, which has remained static since 2001, to 5.5%;
- Gradually increasing the rate of contribution for the self-employed to the standard employer rate prevailing at the time (currently 11.05%); and
- Broadening the social insurance contribution base by removing the exemptions from a social insurance charge for persons over 66 and those in receipt of occupational pensions.
Supports for business
As businesses are now looking to put the pandemic era firmly in the rearview mirror, Budget 2023 will be set against a backdrop of rising economic uncertainty. Many businesses—particularly in the retail and hospitality sectors—face winter months where the impact of rising costs and reduced customer sentiment are likely to be felt.
In addition, employers will face further costs once the Sick Leave Act is brought into operation under Ministerial Order. This will see employers obliged to pay sick leave of 70% of an employee’s salary subject to a cap of €110 per day for up to three statutory sick days per year. This three-day threshold will be increased to five days in year two, seven days in year three, and ten days in year four.
Auto-enrolment also remains firmly on the horizon for employers. It is due to come into effect in 2024 and will see employees enrolled automatically into workplace pension schemes, with matching employer contributions and a State top-up.
Against this backdrop, we would like to see the introduction of practical supports for employers such as:
- The extension of SARP relief beyond 31 December 2022. The relief is an important component in Ireland’s competitive Foreign Direct Investment (FDI) offering and has proved very valuable in attracting talent to Ireland across a range of sectors;
- The extension and reform of the KEEP scheme, particularly in relation to the application of capital gains tax (CGT) treatment to the disposal of shares by participants of the scheme, which can only be achieved in very limited circumstances at present;
- An increase to the Small Benefit Exemption cap to €1,000 to give businesses further flexibility to reward employees in a tax-efficient and straightforward manner.
Other measures we would like to see introduced in the upcoming Budget include:
- The creation of tax-efficient incentives for employers within the private business sector to let properties to staff as a simple and quick means of supporting current housing supply constraints;
- A deferral of the planned changes to the company car benefit-in-kind (BIK) regime, which is due to come into effect on 1 January 2023. The planned changes will see the BIK rate based on a combination of business mileage and the vehicle’s emissions, and is likely to see many employees adversely impacted in comparison to the current regime; and
- Reform of the tax treatment of employer contributions to PRSA schemes so that they are aligned with the tax treatment of employer contributions to occupational pension schemes.
We are here to help you
Budget 2023 is rightly positioned as a ‘cost of living’ budget. From a personal and employment tax perspective, the focus will be on tackling short-term inflationary pressures while maintaining focus on long-term issues. We are here to help you as you work to safeguard the progress made and build resilience for the future.