Pay packets to feel the pinch from income tax changes and new levies

PAY packets will be taking another hit this month as a series of income tax changes and new levies came into being for the new year.

Take-home pay will be reduced due to a narrowing of tax bands and a reduction in tax credits — meaning that more people will be paying tax at 41%, according to PwC senior tax manager Catherine Desmond.

Furthermore, the introduction of the Universal Social Charge (USC) and changes to how private pension contributions are taken from salaries will see further snips to spending power, according to Ms Desmond.

* TAX BANDS: The reduction in the standard tax rate band for a single person means that they will now pay tax at 41% after they earn €32,800. Up to now, the full 41% didn’t hit until they earned €36,400.

For married couples with both working, the tax hike will kick in after they earn €65,600 compared to €72,800 last year.

* TAX CREDITS: A wide number of tax credits, which allowed the claimant to further extend their tax-free income, were also slashed in the budget.

Anyone earning tax credits such as one-parent tax credit, home-carer tax credit or the incapacitated child tax credit will all see their tax-free entitlements fall. For instance up to this month, a home carer was allowed earn €900 tax free as a repayment for his or her services to the state. This tax free sum, payable to stay-at-home mums and carers of elderly people, is now down to €810 over the year.

* UNIVERSAL SOCIAL CHARGES: A new universal social charge (USC) will come into effect this month — the USC is basically an amalgamation and re-arrangement of the health and income levies that were increased and introduced in recent years.

Anyone earning over €4,004 will now pay 2% USC while those on incomes over a meagre €16,016 will be hit with 7%. A 4% charge will come into effect on incomes from €10,037 to €16,016.

According to PwC, the USC is likely to disproportionately impact those on lower salary levels, eg those currently on a €16,500 salary last year were liable to levies of just c€330, whereas under the USC system this increases to €474. Up to this month, you had to earn over €16,000 before you paid the 2% health levy.

* PENSION CONTRIBUTIONS: Changes to how pension contributions are taken from your salary mean a reduction in take-home pay from this month onwards.

Up to this year, if a person was paying into a company pension scheme, defined benefit or defined contribution, or making Additional Voluntary Contributions (AVCs) their levies and PRSI contributions were only calculated after these pension payments had been made.

For instance, if you are earning €800 per week and making pension contributions of €100, you will now be subject to PRSI and USC on the full €800 compared to just €700 last year.

The Government’s Four Year Plan called for the reduction of tax relief on pension contributions At present, those on the 41% tax rate can claim relief at that rate but that rate is due to be halved under the terms of the plan.