Income tax changes, cost of living allowances and what about inheritance tax?

Fiscal experts expect the upcoming general election to guide many of the decisions announced in Budget 2025 on October 1, which will be Finance Minister Jack Chambers’ first budget.

He has already defined his platform around prioritizing “tax relief for families, workers and businesses,” so what might we see there?

Last year, individuals received a tax break of around €800, and it is likely to be around the same this year, so don’t expect a gift budget.

Mindful 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, partner in charge of employee taxation at PwC Ireland, “will be walking a tightrope between trying to win votes and being cautious about further fuelling inflation.”

There will be something in it, though.

“It will be a strategic effort to win middle-class votes,” she said.

“While the government has indicated that this will not be a soft budget, it will want to highlight its achievements and set out its prospects for the future,” agrees Camilla Cullinane, tax partner at KPMG.

This year, the government plans to have a spending and compulsory levy plan totaling €8.3 billion, of which €1.4 billion will be devoted to taxation. This is not much, considering the cost of the income tax cut (see table).

“If you do the maths, most of the €1.4 billion available will be consumed simply to keep up with inflation, rather than putting extra money in people’s pockets,” says O’Doherty.

Could the government then seek to make money by raising certain taxes? Which is unlikely in an election year.

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“We won’t see any bad surprises in terms of revenue,” O’Doherty says.

What is expected, however, is an increase in the bank tax, which will generate funds for tax measures.

Income tax

Given the money available, there will be no “budgetary scope for drastic changes,” Cullinane says, adding, for example, that “we will not see the abolition of the USC.”

The focus will be on helping the so-called “overburdened” middle class and reducing the marginal tax burden, Cullinane says.

“It’s difficult (for Ireland) to compete when it comes to attracting talent,” she said, adding: “As a country, we very quickly reach the top tax rate.”

Cullinane expects changes to the USC rate and brackets, as well as a likely widening of the high-rate income tax bracket. Currently, a worker will start paying tax at 40% on an income of €42,000, and a married couple with one income on an income of €51,000.

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“I don’t think they’ll have enough capacity to push rates down,” she said.

While this may sound like a good thing – and put more money in people’s pockets – it actually just keeps up with inflation and therefore does not represent a “real” tax cut.

“It would be better if these inflation adjustments were done automatically,” she suggests.

And don’t forget that employees will pay more PRSI from 1 October this year, by 0.1%, with further increases until 2028.

And what about the claim in the Tax Strategy Group papers from this summer that the Irish tax system may in fact be too progressive? The papers question whether this level of progressivity is appropriate or whether it represents an excessive burden on other taxpayers. Revenue figures show that around 1.3 million tax units (individuals or married couples) paid neither income tax nor USC this year.

If that is the case, the solution for the government is to broaden the tax base and impose a heavier burden on the poorest. But is this a feasible option in an election year?

“In an election year, we’re unlikely to see them do that,” Cullinane says.

With the minimum wage set to rise by 80 cents 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 their spending, developing some form of personal tax roadmap might be the way forward.

“It would give voters an idea of how and when the tax burden could be reduced,” says O’Doherty, “like a quasi-election manifesto.”

For example, a few years ago it was suggested that personal income tax payers would not be able to reach the top rate until they had an income of €50,000, “but they certainly won’t get there in the lifetime of this government,” O’Doherty said. But specifying when that might happen might be of interest to the electorate.

Housing for all

With an election looming and housing remaining a major concern for all generations, Cullinane expects the government will be keen to outline the steps it has taken in recent years to ease the pressure.

O’Doherty agrees that an announcement will be made that day.

“There has to be something,” she said, adding that it affects too many people “not to do something about it.”

Cullinane suggests that employers should be encouraged, through tax incentives, to build housing for their employees; and employees could in turn benefit from lower housing costs in these units if they were granted a benefit-in-kind (BIK) exemption when earning less than €50,000.

Earlier this year, Ryanair bought 25 houses in north Dublin for its staff, and KPMG believes this should be encouraged.

Cullinane would also like to see tax incentives for investments in converting commercial space into residential units.

“I think there’s definitely room. There are a lot of beautiful properties that, with a little maintenance, would come back to life. It’s a shame to see some of them in this state,” she said, adding that it would revitalize our cities.

This could be achieved by reintroducing a Section 23 tax break. This was originally used to encourage investors to renovate or purchase properties in urban or rural regeneration areas for the rental market. A new approach would encourage the conversion of commercial properties to residential use and encourage individuals to finance the development of new residential units for rental.

Cullinane would also like to see changes to the small landlord regime. “The rules are outdated at this point,” she says, arguing that the same tax system that applies to traders should also apply to landlords.

“It would be a simpler system that would be easier for everyone to understand,” she said.

For tenants, an increase in the rent credit – currently offered at a rate of €750 – would be welcome, as would an extension. As Cullinane points out, the credit is only due to run until 2025.

Further extensions/enhancements could include the mortgage interest relief scheme, which has attracted limited uptake, and the Help to Buy scheme for first-time buyers.

O’Doherty says the Help to Buy ceiling could be increased by €500,000, allowing for some “regional variation”.

Legacy

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Can we expect an increase in the tax exemption threshold for parents with a dependent child of €335,000 on 1 October? This has been promised for a long time – with a figure of €500,000 mentioned – but there is now an expectation that there will be a change this year.

“I think it’s necessary,” Cullinane says, noting that the current threshold has been unchanged since 2019 and was reduced significantly during the financial crisis from a high of €542,544. “The CAT threshold needs to reflect the rise in house prices,” she says.

O’Doherty agrees, adding that she could see the threshold increased to €400,000.

“It would appeal to older people,” she said.

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Capital gains tax

With capital gains tax (CGT) at 33% since 2012, O’Doherty thinks it might be time to cut it.

“It’s quite high,” she says, adding that it’s the third highest rate compared to other European countries. Moreover, she points out that the data suggests that when the capital gains tax rate goes down, yields actually go up, so this could be a source of revenue for the Treasury.

From next January, a new pension tax relief scheme for the transfer of family businesses will come into force. But could the government suspend this plan on Budget Day?

Cullinane hopes so, noting that the proposed changes, which will introduce a €10m cap on capital gains tax-free transfers of business assets between families, will have a “huge long-term impact”.

“This will act as a barrier to the transfer of businesses,” she said, adding that the approach appears “contrary to the objective of developing indigenous Irish businesses internationally.”

Pensions

On pensions, O’Doherty sees potential for changes to the standard fund threshold, which is the limit on tax-related savings people can make. It stands at €2m and was last adjusted in 2014.

“A lot has changed since then,” she says, adding that there is a clear case for indexing the threshold, noting that the lifetime allowance has been completely abolished in the UK.

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Other

While electric cars boomed a few years ago, sales of electric vehicles are now in decline. Could tax incentives then boost demand? As Cullinane points out, the BIK rules for electric cars were effective when they were introduced, but they have been gradually reduced since then.

“This shows that the tax measures are working,” she said, saying they could be reintroduced.

O’Doherty expects new cost-of-living measures, such as an electricity credit, to be announced on the day. But “timing is of the essence” because the government wants voters to reap the benefits of any measures it proposes before the election.