Introduction
The Minister for Finance, Michael Noonan, and the Minister for Public Expenditure and Reform, Paschal Donohoe, have delivered Budget 2017, the first budget under the minority Government. The measures announced include a reduction in the three lowest rates of the USC, increasing the Capital Acquisitions Tax thresholds, a rise in the State Pension (Contributory) and other weekly social welfare payments, and a reduction in DIRT. Details of the changes that will be of most interest to pension, protection and investment clients are outlined overleaf.
Pensions
The only pension related change announced in the Budget was an increase in the State Pension. However, we will wait until the Finance Bill is published on 20 October to see what other changes, if any, happen. For now, we have set out below the current relevant rules that apply to pensions.
Tax Relief on Pension Contributions
Income tax relief on personal contributions to a qualifying pension arrangement continues to be available at the marginal rate of tax.
There was no mention in the Budget of a change to the earnings cap of €115,000.
Maintaining the levels of tax relief is welcome as making adequate provision for retirement is a vitally important aspect of financial planning. Providing for retirement through a private pension arrangement remains the most tax efficient form of long term saving.
Standard Fund Threshold (SFT)
The SFT remains at €2 million for 2017.
Once again, the Minister did not address in his speech whether the SFT will be increased in line with inflation in the future. Section 787O of the Taxes Consolidation Act 1997 allows the Minister to apply an earnings adjustment factor to the SFT. While it is good news that the SFT has not been reduced, we would have concerns that the SFT will not keep pace with inflation if not regularly reviewed by the Minister. We await details of the Finance Bill as this may be dealt with at that time.
Any capital value in excess of the SFT or Personal Fund Threshold (if applicable) on retirement is taxed at 40% and is then subject to tax at the individual’s marginal rate, and any PRSI and USC applicable on drawdown.
Retirement Lump Sum
The Budget did not include any changes in relation to the tax treatment of the retirement lump sum.
The first €200,000 of any retirement lump sum remains tax free with any amount between €200,000 and €500,000 subject to income tax at 20%. Any lump sum amount paid out in excess of €500,000 is taxed at the marginal rate and is also subject to PRSI and USC. Retirement Lump Sums taken on or after 7 December 2005 count towards an individual’s retirement lump sum limits.
State Pension (Contributory)
The maximum personal rate of the State Pension (Contributory) has increased by €5 per week to €238.30 per week. However, payment of the increase will commence in March 2017.
The earliest age at which the State Pension (Contributory) is payable is currently age 66.
Exit Tax
There was no mention in the Budget of a change to the current exit tax rate of 41% on life assurance policies effected after 1 January 2001 (known as gross roll-up policies) despite the fact that there was a change to DIRT. We await confirmation in the Finance Bill.
Just a reminder, the exit tax rate for corporate investors is currently 25%.
DIRT (Deposit Interest Retention Tax)
The rate of DIRT will decrease by 2% each year for the next 4 years until it reaches 33% in 2020.
With effect from 1 January 2017 the rate will be 39%.
Income Tax, PRSI And USC
Income Tax
As predicted there is no change to income tax rates or tax bands. The higher rate of income tax remains at 40% and the standard rate of income tax is unchanged at 20%.
There were some changes to tax credits including the Earned Income Credit for the self-employed and certain proprietary directors which increased from €550 to €950. This forms part of a 3 year move to bring into line the treatment between the PAYE sector and the self-employed. PAYE workers currently get a €1,650 PAYE credit each year.
These changes are effective from 1 January 2017.
PRSI
Current rates of PRSI remain unchanged.
Universal Social Charge (USC)
The Government has announced a number of changes to the USC to take effect from 1 January 2017:
A reduction in the three lowest existing USC rates
An increase in the USC entry point for the third lowest rate from €18,669 to €18,773
Total income of €13,000 or less per annum is exempt from the USC.
The following USC rates will apply if total income is in excess of €13,000:
Rate Threshold 0.5% €0 to €12,012 2.5% €12,013 to €18,772 5% €18,773 to €70,044 8% Balance
The USC rate on self-employed income in excess of €100,000 is 11%.
Medical card holders and individuals aged 70 years and over whose aggregate income does not exceed €60,000 will now pay a maximum USC rate of 2.5%.
October 2016
Corporation Tax
There is no change to the Corporation Tax rate of 12.5% for trading income and 25% for non-trading income.
Capital Acquisitions Tax (CAT)
The CAT rate remains at 33%. However, as anticipated, the CAT thresholds have increased with effect from 12 October 2016 as follows:
CAT Thresholds
Group A: €310,000
Applies where the beneficiary is a child (including adopted child, stepchild and certain foster children) or minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child. Group B: €32,500 Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.
Group C: €16,250 Applies in all other cases.
Capital Gains Tax (CGT)
The rate of CGT remains unchanged at 33%.
The CGT rate is being further reduced to 10% for entrepreneurs on the disposal in whole or part of a business up to an overall limit of €1m in qualifying chargeable gains. This is effective from 1 January 2017.