Changes in USC benefit some, but unpopular tax set to stay

For a tax that was introduced as a temporary measure, the USC has become a budgetary fixture that shows little sign of disappearing.

The budget announcement of changes to how the Universal Social Charge is levied has received a broad welcome, but for many the recovery will only really be complete when it drops off payslips for good.

In 2009, then finance minister Brian Lenihan signalled his intention to combine PRSI, the health levy, and the income levy into a single social charge that would be applied to all income, but at a lower rate. In October 2010, research by the Economic and Social Research Institute (ESRI) said a 7.5% charge could raise enough money to replace all three — but with a warning that it would hit the poor hardest of all.

That December, in the “Everybody pays” Budget, Lenihan introduced the USC from the start of 2011. In his speech he said, “the Universal Social Charge requires that everyone makes some contribution, however small, to the provision of services”.

Set at three different levels — 2%, 4%, and 7% — he said it was a four-year plan. Since then there have been a few changes — including 330,000 low-income earners being exempted from the USC in Michael Noonan’s first Budget — but this week’s announcement seems most significant.

First, increasing the entry point to the USC to just above €12,000 removed 80,000 low-income workers from the charge.

Then came the increase in the entry point to the second rate of USC from just over €10,000 to just above €12,000, with another rise for the “upper ceiling”, from just over €16,000 to just above the level of the minimum wage.

In tandem with other changes, such as increasing the income tax standard rate band by €1,000 to €33,800 for single individuals and reducing the top rate of income tax from 41% to 40%, the minister also introduced a new 8% USC rate for incomes in excess of €70,000 and an 11% rate of USC for self-employed income in excess of €100,000.

The minister said: “A working family with three children where both parents earn €50,000 each will have an additional €100 per month in their pocket.”

The 7% rate is unchanged, but according to Michael Lynch, resident partner in KPMG, the “squeezed middle” have gained elsewhere, such as through the 1% reduction in income tax.

While he said that continuing economic recovery would mean the impact of the USC being pushed up towards the higher pay grades, Social Justice Ireland’s budget analysis said while the income tax package had a full year cost of €642m (€237m on USC changes and €405m on income tax reductions), “these changes are unfair and provide substantially larger gains to those on higher incomes”.

It seems that when it comes to USC, we’ll have to lump it for a while longer.

USC changes

New bands and rates: 

Income up to €12,012 exempt, otherwise USC payable on 

  • €0 — €12.012 at 1.5% 
  • €12,013 — €17,576 at 3.5% 
  • €17,577 — €70,044 at 7% 
  • €70,044 — €100,000 at 8% 

For incomes above €100,000:

  • PAYE pays at 8%
  • Self-employed at 11% 

Medical card holders and those over 70 where income is less than €60,000 will have a maximum USC rate of 3.5% 

  • Full year cost of USC changes — €237m 

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