Record 666,400 pay tax at top rate of 42%

A RECORD 666,400 taxpayers paid tax at the top rate of 42% this year, according to figures compiled by the Department of Finance.

This is expected to drop to 658,077 in 2006 as a result of changes introduced in the Budget by Finance Minister Brian Cowen.

The decision to raise the standard rate income tax threshold by €2,600 in the 2006 Budget represents the single biggest increase in recent years, although Mr Cowen made no commitment about index-linking the tax bands in future. This means that 31.9% of workers will pay the top tax rate, well in excess of the 20% targeted by the coalition partners in the programme for government.

And the number of people working will exceed two million for the first time in 2006.

An unprecedented 741,114 people will not earn enough money to be caught in the tax net the figures, compiled for Mr Brian Cowen for his 2006 Budget, reveal. The numbers paying tax at the top rates would be 90,000 higher but for Mr Cowen's decision to increase the earning threshold on the standard rate of income tax.

"This increase is aimed at ensuring that all those taxpayers earning around the projected average industrial wage (€32,000) in 2006 will pay tax at the lower rate of income tax. This is worth €11 per week in increased take-home pay for those on average incomes," Mr Cowen told the Dáil in his second Budget speech.

It is estimated the increase will cost an additional €456m in a full year. The minister said 52,000 low-income taxpayers would also be removed from the tax net as a result of changes to employee and personal tax credits.

Employee tax credit will increase by €220 per year to €1,490 which will cost the Exchequer an additional €285m.

The basic personal tax credit was also raised by €50 per year for single and €100 per year for married couples in a measure that will cost €96m.

Mr Cowen claimed these increases would ensure that everyone currently on the minimum wage would remain completely outside the tax net next year.

More than 72,000 low earners will also benefit by an additional €8 per week due to an increase in the threshold for the payment of the 2% health levy. The liability base will go up from €400 per week to €440 per week.

The elderly will also benefit from an increase in the tax exemption limits for people aged over 65 by €500 for single and €1,000 for married couples.

Mr Cowen claimed the combined measures would see a single person on €22,000 per year earning a net weekly increase of €13.65. A married couple with one earner on €40,000 per year will gain €12.92 net per week.

The country's largest trade union, SIPTU, said the combined increases in tax credits given the Government's strong financial position were "more niggardly than expected."

The employers' group, IBEC, described the increases in income tax bands and credits as "substantial" and predicted they would boost living standards for all workers.

However, IBEC director general Turlough O'Sullivan warned that such increases highlighted the need for wage moderation over the coming year to ensure the competitiveness of Irish business.

Tax Net 2006:

* 36% of workers will pay no tax.

* 32% on standard 20% rate.

* 32% on the top rate of 42%.

* Raised the standard rate income tax threshold by €2,600.