Tax experts expect an upcoming general election to guide many of the decisions announced in Budget 2025 on October 1st in what will be Minister for Finance Jack Chambers’s first budget.
He has already set out his stall around prioritising “tax breaks for families, workers and businesses”, so what might we see?
Well, last year, individuals benefited from a tax package of about €800, and it is likely to be of a similar order this year. So don’t expect a giveaway budget.
Cognisant of recent warnings from the Irish Fiscal Advisory Council (Ifac) that a giveaway budget could risk overheating the economy, the Government, says Doone O’Doherty, workforce tax partner with PwC Ireland, will be “walking that tightrope between trying to win votes and being cautious of stoking inflation further”.
There will be something in it, however.
“It will be a strategic effort to win over middle-class votes,” she says.
“While the Government has signalled it won’t be a giveaway budget, they will want to showcase their accomplishments and set out their stall for the future,” agrees Camilla Cullinane, a tax partner with KPMG.
This year, the Government expects to have a total tax-and-spending package of €8.3 billion to play around with; of this, taxation measures will come to just €1.4 billion. It is not a lot, when you look at how much cutting income taxes costs (see table).
“When you run the numbers, the bulk of the €1.4 billion available will be consumed in just keeping pace with inflation, rather than putting additional money in people’s pockets,” says O’Doherty.
So could the Government look to make money by hiking some taxes? Unlikely in an election year.
“We won’t see any negative surprises in terms of revenue raising,” says O’Doherty.
What is expected, however, is an increase to the bank levy, which will generate some funds for tax measures.
Income tax
Given the money available, there’s not going to be “fiscal space for any drastic changes”, says Cullinane, adding, for example, that “we won’t see the abolition of USC”.
The key focus will be on helping the so-called squeezed middle and reducing the marginal tax burden, says Cullinane.
“It’s difficult [for Ireland] to compete when trying to attract talent,” she says, adding, “as a country, we reach the top rate of tax very quickly”.
Cullinane expects changes to perhaps the rate of USC, and the bands, as well as a likely widening of the higher-rate income tax band. At present, a worker will start paying tax at 40 per cent on income of €42,000, and a married couple with one income on earnings of €51,000.
[ Income tax cuts a ‘core part’ of Budget 2025 package, says Jack ChambersOpens in new window ]
“I don’t think they’ll have enough capacity to bring rates down,” she says.
While this might sound good – and will put more money back in people’s pockets – it’s really only keeping in line with inflation, and thus doesn’t’ represent a “real” reduction in taxation.
“It would be better if those inflation adjustments were made automatically,” she suggests.
And remember, employees will be paying more PRSI from October 1st of this year, by 0.1 per cent, with further increases out to 2028.
And what about the assertion in this summer’s Tax Strategy Group papers that Ireland’s taxation system may, in fact, be too progressive? The papers asked, is this level of progressivity appropriate, or does it place an excessive burden on other income earners? Figures from Revenue show some 1.3 million tax units (individuals or married couples) paid neither income tax nor USC this year.
If this is the case, the answer is for the Government to broaden the tax base and impose a greater burden on the lower paid. But is this likely in an election year?
“In an election year, we’re unlikely to see them do that,” says Cullinane.
Given that the minimum wage is expected to increase by 80 cent an hour to €15.25 in January, changes to PRSI are also likely, while KPMG would also welcome a cap on the amount of income subject to PRSI.
But given the constraints on how much they can spend, outlining some form of a personal tax roadmap could be the way to go.
“It would give the electorate some line of sight as to how, and when, the tax burden may be reduced,” says O’Doherty, “like a quasi electoral manifesto”.
For example, it was suggested some years ago that personal income tax payers wouldn’t hit the top rate until they reached earnings of €50,000 “but they’re certainly not going to achieve that in the lifetime of this Government”, says O’Doherty. But outlining when this might happen may appeal to the electorate.
Housing for all
With an election looming, and housing still a big issue of concern right across the generations, Cullinane expects the Government will be keen to set out the steps they’ve taken in recent years to alleviate pressure.
O’Doherty agrees there will be something announced on the day.
“There has to be something,” she says, adding that it affects too many people “not to address it”.
Cullinane suggests that employers should be encouraged with tax incentives to build accommodation for their employees; and employees could in turn benefit from lower housing costs in such units if they enjoyed a benefit-in-kind (BIK) exemption when earning less than €50,000.
Earlier this year, Ryanair bought 25 homes in north Dublin for its staff, and KPMG says this should be encouraged.
Cullinane would also like to see tax incentives for investment in converting over-the-shop spaces into residential units.
“I definitely think there’s space there. There are lots of beautiful properties which, with some TLC, would come back to life. It’s a pity to see some of them the way they are,” she says, adding that it would reinvigorate our towns.
This could be done through the reintroduction of a Section 23 type relief. This was originally used to incentivise investors renovating or buying properties in inner-city or rural regeneration areas for the rental market. A new approach would encourage the conversion of commercial properties for residential use, and encourage individuals to finance the development of new residential units for letting.
Cullinane would also like to see changes to the small landlord regime. “The rules are outdated at this stage,” she says, arguing that the same tax system that applies to traders should also apply to landlords.
“It would be a simpler system, and easy for everyone to understand,” she says.
For those renting, an increase in rent credit – currently offered at a rate of €750 – would be welcome, as well as an extension. As Cullinane notes, the credit is only due to run until 2025.
Other extensions/enhancements could come to the mortgage interest relief scheme, which has been of limited interest, and the Help-to-Buy scheme for first-time buyers.
O’Doherty says the Help-to-Buy cap could be increased from €500,000, allowing for some “regional variation”.
Inheritance
[ Inheritance tax: What are the rules and how might they change in the budget?Opens in new window ]
Can we expect an increase in the tax-free parent-to-child threshold of €335,000 on October 1st? It has long been promised – with a figure of €500,000 mooted – but the expectation now is that there will be a change this year.
“I think there has to be,” says Cullinane, noting that the current threshold has been unchanged since 2019, and was cut dramatically during the financial crisis from a high of €542,544. “The CAT threshold needs to reflect rising house prices,” she says.
O’Doherty agrees, adding that she could see the threshold rise to €400,000.
“It would appeal to the older demographic,” she says.
Capital gains tax
Given that capital gains tax (CGT) has stood at 33 per cent since 2012, O’Doherty thinks it could be time for a reduction.
“It’s quite high,” she says, adding that it’s the third highest rate when compared with other European countries. Moreover, she points out that evidence suggests that when the CGT rate falls, the yield actually rises, so it could be a revenue raiser for the Exchequer.
From January of next year, a new regime of retirement relief aimed at the transfer of family businesses comes into play. But might the Government press pause on this plan on budget day?
Cullinane hopes so, noting that the proposed changes, which will introduce a cap of €10 million on CGT free transfers between families of business assets, will have a “huge impact in the long term”.
“It’s going to be a barrier to the transfer of businesses,” she says, adding that the approach seems “contrary to the goal of growing Irish indigenous businesses to international scale”.
Pensions
On the pensions front, O’Doherty sees potential for a change to the standard fund threshold, which is the limit of tax-related savings from which people can benefit. It stands at €2 million, and the last time it was adjusted was back in 2014.
“A lot has changed since,” she says, adding that there are clear arguments to index-link the threshold, noting that the lifetime allowance was completely abolished in the UK.
[ Pat Leahy: Budget one-offs are economically indefensible and politically smartOpens in new window ]
Other
While there was an electric car boom some years ago, EV sales are now on the decline. So, could tax incentives help boost demand? As Cullinane notes, BIK rules for electric cars were successful when first introduced, but have been tapering since.
“It shows that the tax measures do work,” she says, arguing that they could be reintroduced.
O’Doherty expects to see further cost-of-living payments, such as an electricity credit, announced on the day. But “timing is key”, as the Government will want the electorate to enjoy the benefit of any measures it offers before an election.
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