Removal of the PAYE Tax Credit, signalled in the Summer Economic Statement, could see hundreds
of thousands of workers paying a tax rate close to 70% on a slice of their income
Removal of PAYE Tax Credit unhelpful for Ireland’s competitiveness
Irish Tax Institute
Analysis of the removal of the PAYE Tax Credit, by the Irish Tax Institute shows that PAYE income
earners who lose the PAYE Tax Credit could pay a tax rate of close to 70% on a certain section of
their income, far in excess of the current marginal rate of 52%.1
The removal of the PAYE Income Tax Credit is a stated objective in the recent Summer Economic
Statement and all indications are that the PAYE Tax Credit will be removed from people above a
certain income level.
While the Summer Economic Statement does not detail the exact point at which the PAYE Tax Credit
will be removed, previous budget measures and comments from Government give some indications.
The tax cuts in recent Budgets have been capped at income levels of €70,044 while the Minister for
Finance Michael Noonan very recently defined Middle Income as people below an annual salary of
€70,000. It would seem reasonable to assume that the removal of the PAYE Tax Credit might apply
from €70,000 upwards; over 270,0002 taxpayers will be impacted by this tax measure if that is the
case.
If the PAYE TAX Credit is removed, it will probably be done on a sliding scale over an income range
chosen by the Government. A €10,000 - €15,000 income range is a reasonable estimate given the
similar approach taken by the UK when they removed their personal allowance.
If the removal of the PAYE Tax Credit kicks in at a salary of €70,000 and is tapered out for income
earned between €70,000 and €80,000 then the marginal rate of tax paid on every euro of income
earned in this €10,000 band will be 68.5%. If the credit is tapered out on income between €70,000
and €85,000, the marginal rate of tax on income earned in this €15,000 band will be 63%, over 10%
points higher than the current marginal rate3.
Irish Tax Institute President, Mary Honohan said: “The removal of the PAYE Tax Credit is likely to
impact productivity with a heavy extra tax burden being imposed for extra income earned and pay
related bonuses. The removal of the PAYE Tax Credit will also increase the tax wedge at certain
income points and may cause upward pressure on wages at a time when we need to maintain our
competitiveness vis-à-vis other countries and in light of the recent Brexit vote. This is the very time
when we should be doing everything we can to improve our personal tax competitiveness, not
damage it”, she added.
The Institute President highlighted that the removal of the PAYE Tax Credit at €70,000 would mean
income earners in Ireland on €75,000 would have a higher tax bill than workers in Paris, London,
Madrid and Stockholm – over 270,000 taxpayers.
1
This marginal rate applies for people earning €70,044
Revenue, May 2016
3
See the marginal rate calculations in Appendix I
2
If the salary point for the removal of the PAYE Tax Credit was €80,000 this would impact over
200,0004 individuals. The removal of the tax credit at €80,000 would create the very same personal
tax burden issues with income above €80,000 being subjected to extremely high levels of income
tax. In fact, no matter what salary point the Government choose for the removal the PAYE Tax Credit
the same high personal tax issues will apply on income above that point.
Ms. Honohan said: “Leading voices on FDI and business are already sending strong warning signals
about the competitiveness of Ireland’s personal tax regime. The PwC 2016 CEO Pulse Survey
published just days ago shows that concerns amongst CEOs around the lack of availability of key
skills is at an 11-year high.”
The President said: “CEOs are telling us that maintaining our cost competitiveness, access to skills
and reducing the personal tax burden are amongst their greatest concerns. Pressure on skills is
higher in Ireland than globally and there is stiff competition for key talent. “
Ms. Honohan said the Summer Economic Statement 2016 notes that the removal of the PAYE Tax
Credit for high earners would ‘further enhance the progressivity of the income tax system’. “I think it
is also important to explain that Ireland already has the most progressive tax system in the EU and is
close to the very top of the world rankings on progressivity (2nd in the OECD)”, concluded the
Institute President.
4
Revenue, May 2016