Income tax

Budget 2022: Many want tax brackets widened, but don’t know exactly what it means

A LOT of people are in favor of government indexing tax brackets in the budget, but there is confusion as to what this means.

A survey by Taxback.com found that three in 10 people would support a widening of the tax brackets.

But nearly half of those polled weren’t sure what exactly that meant.

Indexing tax brackets means allowing people to earn more before they are taxed at the highest rate.

This is to take account of rising inflation and prevent those who benefit from a salary increase from being largely eaten up by income tax.

At present, taxpayers can earn € 35,300 at the income tax rate of 20pc. Income exceeding this amount is then taxed at 40pc.

The personal tax bracket has not been adjusted since 2019.

Tánaist Leo Varadkar has suggested that measures to increase personal income tax brackets based on inflation will be included in Tuesday’s budget.

If there is no adjustment in the tax brackets, then a person earning € 40,000 who gets a 2.5% salary increase, or an additional € 1,000 next year, would lose more. half for income tax, universal payroll tax (USC) and PRSI, Varadkar says.

The adjustment of the brackets would allow them to earn between 750 and 800 € of salary increase.

But the terminology is proving confusing to people, with four in ten unsure of what it means to index tax brackets.

Commodity tax manager at Taxback.com Marian Ryan said policymakers need to stop using complex terminology when it comes to describing planned budget measures.

She said this was important to ensure that those who will be most affected can understand the impact of such changes on their daily lives.

“The tax brackets for individuals have not been adjusted in this country since 2019, when they went from € 34,550 to € 35,300.

“This means that in effect the price increases that have taken place since then have directly reduced the purchasing power of workers,” Ms. Ryan said.

She said there was a need for people to be able to have more of their income taxed at the lower rate to compensate for soaring prices.

The current inflation rate is 2.8%, but energy costs, transportation costs and the price of restaurant meals have all increased by multiples of the overall inflation rate.

Ms Ryan said: “So a worker’s financial ability to afford these goods and services will be lower than in previous years, even if the band is increased.”

However, she said the bigger problem is that increasing the current threshold amount of € 35,300 based on inflation will not have a positive impact on anyone earning less than € 36,288.

This is because any change will only benefit those whose incomes exceed the threshold because they pay the highest tax rate.

“One could argue that it is the working poor who have the greatest financial need for their purchasing power to increase in line with inflation. “

The Taxback.com study found that 45 percent of the 2,200 respondents, some 45 percent, do not fully understand what tax indexation means.

Some 37% said they agreed to the introduction of tax indexation.

But 18pc said Finance Minister Paschal Donohoe should leave the tax brackets as they are.


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