DIRT hike hopes to turn savers into spenders

THE Government has made an attempt to encourage consumers to spend their cash by increasing a tax on savings.

DIRT tax on deposit accounts will be increased by 2% to 27% and by 2% to 30% in the case of longer-term deposit accounts.

Financial service providers such as banks, building societies and post offices offer accounts where you can save a sum of money for which they will pay you an annual rate of interest in return, usually as a percentage of the deposit. The interest you receive is subject to a tax called Deposit Interest Retention Tax (DIRT). The tax is deducted by the bank before the interest is paid to the customer.

Head of William Fry Tax Advisors, Martin Phelan, said private savings in bank deposit accounts represent dead money to the economy, especially now when “banks can’t lend”.

“Offering a lower tax rate on savings income (without even a limit) just encourages the private citizen to save. Most of the billions of profits made by people from the property bubble are sitting dead in deposits earning millions of euro in interest and still only paying 27% tax.

“Compare that to a worker who earns €50,000 and pays a top rate of 42% income tax. We are rewarding those who earn passive income and penalising those who work, surely everyone should pay the same rate of tax on income, earned or otherwise.”

The last time DIRT was increased was in April 2009 when it went up from 23% to 25%.

Tax partner with KPMG, Michael Lynch said: ‘The DIRT changes were expected and are designed to encourage spending and reduce the saving incentive for consumers.”

The increased rates will apply to payments, including deemed payments, made on or after 1 January 2011.