Donohoe hints he may raise threshold of higher tax band

Finance Minister may increase threshold to higher tax band to €39k as speculation mounts around provisions in Budget 2023

Finance Minister Paschal Donohoe stressed that this month's budget is intended to ensure workers have more money in their pay packets. File picture

Finance Minister Paschal Donohoe has indicated his support for adjusting the higher tax band to ensure workers can keep more of their income.

As part of Government budget deliberations, Mr Donohoe is considering increasing the threshold for entry into the higher tax band to €39,000 per year.

Currently, workers hit the higher 40% rate of tax at €36,800, meaning they could earn a further €2,200 at the lower rate if Mr Donohoe presses ahead with the change.

The budget will be focused on ensuring workers have more money in their pay packet, Paschal Donohoe stressed, to help address the cost-of-living crisis.

He said the Government will “get to a point where less of your income is on the higher rate”, adding that the entry point to the higher rate was “distinctive” to Ireland.

Sources said Mr Donohoe had discussed the proposal with Coalition leaders yesterday, but the final shape of next Tuesday’s budget will “go down to the wire”.

An expansion of tax bands is now the “most likely” method of increasing take-home pay, because an alternative proposal for a 30% tax rate would “eat up” much of the €1.05bn tax package.

A Fine Gael source said a positive tax package will be a “major achievement” for the party and that the budget will “help a lot of people”.

A Green Party source indicated that talks are ongoing on the final shape of a cut to childcare fees, though there is little resistance to a cut of around €200 per child per month for parents.

It is also expected that a 20% cut to public transport fares announced earlier this year will be extended, but that they will not be cut further.

Meanwhile, the independent Parliamentary Budget Office (PBO) has raised concerns about the size of the budget being planned, saying there is considerable pressure on public finances to maintain existing levels of public services.

In its pre-budget commentary, the PBO stated that “difficult choices will need to be made”.

The budget is expected to comprise of tax package of €1.05bn and expenditure of €5.65bn.

Of the latter figure, €400m will take effect in 2022, with a further €800m relating to increased capital spending in 2023.

The remaining €4.5bn is split between €2.2bn to maintain existing levels of service, including funding the public-sector pay proposal, meeting demographic and inflationary pressures, and €2.3bn for new measures.

The PBO says the challenge will be “exacerbated” by the fact that the August public sector pay proposal, if agreed, will also be drawn from funds allocated to “maintain existing levels of services”.

“Budget 2023 will therefore involve challenging decisions regarding spending priorities, with some doubt as to whether the budget package [as currently outlined] can fully support existing levels of service,” it stated.

PBO director Annette Connolly said: “With the unexpected level of inflation in 2022 and the 2023 forecast for continued inflation, there is considerable pressure on the public finances to maintain the existing level of public services and to insulate welfare recipients and taxpayers from decreases in real income.”