Much of the focus in the run-up to the budget has been on spending and on issues such as the proposed ending of once-off payments and what increases in key welfare rates and rules might be.
But what about tax? For the so-called squeezed middle, tax changes remain key to putting money directly into people’s pockets. So what should we expect this year?
1. The cash dilemma
Senior Ministers have warned repeatedly about the limitations they face in shaping the budget. Tánaiste Simon Harris warned this week that “there may not be a lot of space to do a lot of personal tax this year”.
Some €1.5 billion has been set aside for a tax package. Subtract from that a substantial amount to meet the commitment to cut VAT on hospitality to 9 per cent and, on the face of it, you are not left with much. This is reportedly causing unease on the Fianna Fáil backbenches in particular, where the VAT cut is seen as a Fine Gael measure.
RM Block
Let’s look at the figures. If VAT was cut for the entire hospitality sector, it would cost more than €870 million a year.
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If the reduction to 9 per cent was just for food services, the cost falls to €670 million. Postponing the introduction of the cut to, say, spring 2026 would reduce the cost further next year, but the full price would still have to be paid in subsequent years.
Some compromise looks likely. There will be room for a personal tax package – the issue is its scale.
2. How the numbers stack up
The €1.5 billion budget tax package is a net figure. In other words there will be money raised through some tax increases, as well as the cuts, and the €1.5 billion is the balance between the two.
So how will the pluses and minuses balance up and is there room for manoeuvre? A significant fundraiser will be the renewal of the bank levy, which would raise about €200 million, a substantial amount in a budget where the numbers are tight.
Another €70 million or so could come from hiking tobacco excise yet again, though the payback from these rises is not what it once was. These both put a bit more in the pot.
Some €120 million will be raised through the annual increase in carbon taxes, which will pay the cost of keeping the VAT rate on home energy bills at 9 per cent.
Given the recent electricity price increases – and the statement that there will be no household energy credits – there is no way the VAT rate on home bills will be allowed to rise too.
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There will be other smaller gives, and some takes, including in the business tax area. And an unknown is whether there will be any new construction tax breaks and, if so, what they might cost. There is room for a row here, too.
But the ability to raise some extra cash – and restrict the 2026 cost of the VAT cut for hospitality – will allow for some cuts on personal tax and universal social charge (USC), though not as much as in last October’s budget when the reductions in this area cost more than €1.8 billion.
3: Putting together the tax package
So how much can be found for personal tax?
To make any kind of difference, a sum of at least €1 billion would be needed, which would still be significantly less than last year.
Department of Finance calculations are that a sum of just over €1 billion would be needed to inflation-proof the income tax system – in other words to ensure that credits and the standard rate band, which determines the rate at which people enter the higher 40 per cent tax rate, rise to match expected wage inflation of around 4 per cent. This is surely the minimum possible.
If this does not happen, higher wages can erode the real value of tax credits and leave more income taxed at the higher, 40 per cent rate.
Most earners benefit from two standard tax credits. A 2026 tax package might include a €160-€200 combined increase in the standard tax credits paid to most earners – in other words the personal and employee tax credits would both rise by €80-€100 and the earned income credit – which applies to the self-employed – would increase by the same amount. The specific credits applying to home carers, single parents and others would increase, too.
The other key measure to adjust for inflation is increasing tax bands,+ and particularly the rate at which people enter the higher 40 per cent income tax rate, currently €44,000 for a single person or €53,000 for a married couple with one earner.
This rose by €2,000 in the last budget and our wage inflation adjustment this time would require a rise of around €1,750. A €1,500 increase would be the bare minimum.
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So in this scenario the income tax cuts would be less than last year and there would be no room for big USC reductions, bar perhaps a rise in the some of the ceilings at which the different rates apply, again to reflect wage inflation. The personal tax system, in other words, could be index-linked.
Personal circumstances will mean some get some. Given the – entirely justified – political heat around renting, the credit here is likely to rise too.
Last October a €250 increase cost €65 million and it would be a surprise to see anything less in next month’s package. Also, there must be a temptation to renew the mortgage interest relief, which can deliver a maximum of €1,250 for one more year to households paying higher rates. This was costed at €44 million last year and low uptake may have cut the bill.
The Cabinet also needs to decide whether to offer other specific reliefs, for example in inheritance tax thresholds.
4. Here is the issue
The Programme for Government promises, if the economy remains strong, to index credits and bands “to prevent an increase in the real burden of income tax”. We have seen how this may just be affordable. But the problem for the Coalition is twofold.
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First, the permanent tax package will deliver less than last October. Then, a single worker on €50,000 gained €859 in cash terms.
This year, looking at our smaller package, it might fall – using our speculative calculations – to around €700. For a joint-income couple on about €115,000, last year the income tax gain came to €1,753. This year it might be between €1,400 and €1,500.
Second, if the Government sticks to its guns and there is no cost-of-living package with energy credits and double child benefit weeks, then households will notice that too. Our single earner with no children would have received an extra €250 from last year’s budget in two energy credits (plus another €250 if the person was a renter).
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Our dual income couple would have received the €250 for the energy credits and an extra €280 for every child they had. That is €1,090 for a three-child family.
So a smaller tax package and no cost-of-living package will mean much less significant gains for households from this budget.
The political stance of the Coalition is that money needs to go now to vital investment in areas such as housing and infrastructure and to permanent supports for households and particularly key areas of need.
They will try to put money back in household pockets through measures such as childcare supports. But, whatever it does, politically this budget will still be a hard sell.
