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Budget 2025 is anticipated to ease the burden for all taxpayers and is not expected to contain any unpleasant surprises for taxpayers. With warning from the Irish Fiscal Advisory Council of the risk from a giveaway budget of overheating the economy, we expect a careful balance between expectation and impact for Jack Chambers in his first budget.
• Expect increases across all social welfare payment.
• Possible measure to assist householders with increases in the cost-of-living payments.
• Income taxes are expected to reduce.
• Potential meaningful increase in the tax-free parent/child threshold.
• Capital Gains Tax may not substantially improve following Budget 2025.
• Likely to see introduction of measures to alleviate pressures in the housing market.
Strong economy, but wrong fiscal stimulus could spike inflation
The Irish economy is strong. Employment has grown by almost 16% since the start of the pandemic, compared to an increase of just 0.4% in the UK. At the same time, wage growth has been rapid over the last year. The combination of high employment and strong wage growth has helped to swell tax revenues. What’s more, economic growth and consumer spending has outperformed expectations and inflation has fallen back below 2%, helping to set the foundations for more domestic economic growth in the future. The headline budget is also in a surplus, which will be swelled by the recent court decision on Apple.
However, a very tight labour market and rapid wage growth means there is very little slack in the economy. A generous budget risks boosting demand for labour even further, and with the unemployment rate already at just 4.2%, there is a risk that extra government spending simply pushes inflation back up rather than stimulating real economic activity. Especially, as the ECB further reduces interest rates to stimulate the faltering eurozone economies.
Focusing spending on investment in infrastructure, especially on housing and transport, and the energy transition away from fossil fuels would address some constraints on growth, without being overly stimulatory on inflation.
Overall, the Irish economy is in a robust state, especially compared to other European countries like Germany and the UK, but a very tight labour market combined with lower interest rates risks a resurgence in inflation in the case of an overly generous budget.
Steady as she goes - simplification is key
The Irish exchequer continues to benefit from significant increases in corporation tax receipts, with a 40% increase recognised in receipts in August 2024 when compared to the same period last year. There is no guarantee that these revenue streams will remain at this level indefinitely, and therefore, to widen the Corporate Tax base, and boost Ireland’s attractiveness as an investment location, the core focus for Budget 2025, and future Budgets, must be aimed towards the simplification of Ireland’s Corporate Tax regime. This should include, among others, simplifying the Irish interest deductibility rules and the availability of reliefs such as the research and development (R&D) tax credit.
The Irish Corporate Tax regime has been subject to unprecedented changes over the past number of years to ensure Irelands alignment with the measures and actions set out under the OECD BEPS Action Plan (which included, among others, changes to tackle Hybrid Mismatches, Interest Deductibility, Mandatory cross border disclosure regime, and prevention of tax treaty abuse), along with a once-in-a-generation reform to the corporation tax system through the introduction of Pillar Two legislation, a global endeavour to enforce minimum tax standards and applies specific rules to address the tax challenges of the digital economy.
We anticipate Budget 2025 will not introduce any additional complex legislation but will include a first step towards simplifying the Irish Corporate Tax system through the introduction of a tax exemption on certain foreign dividend income, paid to Irish Tax resident companies. Presently, Ireland stands as an outlier among EU countries and a select few OECD nations by employing a "tax and credit" system in relation to foreign source dividends.
This significant shift towards a dividend exemption would underscore Ireland's endeavour to align more closely with prevailing international tax norms. Additionally, while not expected to form part of Budget 2025, the broadening of this exemption in the future to include all dividends along with foreign branch profits will be an important next step that must be taken to continue to enhance Irelands FDI offering.
Reductions in income tax and tweaks in USC
Income taxes are expected to reduce in Budget 2025. In recent years the rate band at which the lower rate of 20% tax is paid generally increases somewhat. This increased in last year’s budget from €40,000 to €42,000 for an individual and from €49,000 to €51,000 for a married couple with one income. A further increase, possibly at a higher level, is expected this year. Tax credits are likely to increase marginally also, the combined effect of both being to reduce the level of income tax paid by all taxpayers. In reality these tax changes are required to keep pace with inflation and may not lead to any real increase in spending power.
There may also be some tweaks in USC (another form of income tax), perhaps taking more taxpayers out of the higher 8% rate band.
Increase to inheritance threshold
This may be the year when we finally see a meaningful increase in the tax-free parent/child threshold of €335,000 which is a lifetime threshold on all gifts/inheritances from parents. This threshold was substantially eroded following the financial crisis of 2007/2008 and has not been replenished to any meaningful level. The low threshold is a real concern for ageing parents particularly with rising house values. A sizeable increase, bringing the threshold closer to the high of €542,000 of 2009, would be welcomed and we anticipate some move in this direction.
Calls for an enhancement in Entrepreneur Relief
There has been very little movement in the core capital gains tax (CGT) of 33% for many years, and a reduction in this rate would be seen as very positive for business transactions. There have also been calls for a number of years for an enhancement in Entrepreneur Relief which provides a rate of 10% on the first €1m of gains. However, there is no certainty that we can expect any reduction in CGT in Budget 2025 in either of CGT rates.
It is worth noting that changes in Retirement Relief introduced in the last Finance Act are due to come into force from 1 January 2025. This is a key relief availed of when businesses are transferred from one generation to the next. There are positive changes in this relief for some which were welcomed. For valuable family businesses, a cap of €10 million on the value that can transfer free of CGT to a child of the owner, is a real concern. Previously there was no limit on the value of chargeable business assets that could transfer to a child, free of CGT. GGT may not be an area of substantial improvement following Budget 2025.
Changes to the pension regime
There has been much discussion of changes to the pension regime in the current budget. The maximum fund that an individual may fund is capped at €2 million (the standard fund threshold). This limit has remained unchanged for 10 years, in a time of rising inflation.
Reductions in the level of personal taxes to help attract and retain talent
At a time when attracting and retaining talent in Ireland is a concern for many businesses, reductions in the level of personal taxes would be helpful. The impact in any one year is unlikely to be a “game changer”, but reducing the level at which employees hit the top rate of income tax is a move in the right direction.
It should be noted that employers and employees are already facing increases in PRSI from October 2024 of 0.1% as all PRSI contribution rates will increase, with further increases each year from 2025 to 2028. The stated purpose of the increases is to replenish the Social Insurance Fund and to support the retention of the State pension age at 66 years. Coupled with this increase, employers will be facing into pension auto enrolment in 2025, where for the first-time employers are required to contribute towards employee pensions. This is likely to hit smaller employer hardest, who have not been funding employee pensions to date.
The housing crisis also impacts employers, in particular business who are recruiting from abroad or relocating employees into Ireland. Any measures to alleviate the pressures in the market would be welcomed by employers also.
Will the 9% VAT rate remain "unjustified"?
VAT remains a crucial revenue generator for the exchequer with VAT receipts in 2023 accounting for circa 23% of the net tax receipts, approximately €28.4 billion and the Budget 2024 estimate for the net VAT yield in 2024 is €21.8 billion.
In advance of the 2025 Budget the Department of Finance, via its Tax Strategy group, earlier this year, took a close look at current VAT rates and the impact of adjusting them, along with some considerations about ongoing EU discussions on VAT in the digital age.
With increasing cost pressures on the tourism and hospitality sector, the industry is calling on the Minster for Finance to restore the second reduced VAT rate of 9%. The second reduced VAT rate was originally and temporarily introduced during the economic crisis in 2011, temporarily reintroduced during the Covid 19 pandemic to support the sector specifically and reverted back to 13.5% in September 2023. Separately there has been calls for the VAT reduction on gas and electricity originally extended to end-October 2024 to be further extended to alleviate the continued pressure on energy related costs.
The hospitality sector’s request to revert to a 9% VAT rate was dismissed as “unjustified” in the TSG papers so therefore it remains to be seen what the Budget will contain.
Extending the "help-to-buy scheme" would be welcomed
Housing pressures continues to be a key concern with the need for a rapid increase in the housing stock to keep pace with demand for both buyers and renters, and the current cost of housing is beyond the reach of many. There are substantial pressures on government when it comes to housing.
Given the current crisis there are likely to be some new measures announced on budget day. In recent years, a tax has already been introduced on vacant homes and also a zoned residential land tax, but it is probably too early to say if these are achieving their aim of increasing availability of housing and developed land. From the perspective new homeowners entering the housing market, extending the “help-to-buy” scheme would be welcomed. This applies on property costing up to €500,000 currently and provides a refund of income tax paid over the previous 4 years, capped at €30,000.
Conclusion
It is difficult to pinpoint the new tax measures which will generate increased Revenue, outside of the usual increases in excise duties etc. Increases in Revenue compliance interventions have been a feature in recent years, with ever increasing access to data by the Revenue Commissioners. The enhanced reporting of payments to employees has been a part of this process and may be expanded as it beds down so that more information is readily available to the Revenue Commissioners.
