Budget 2027: €2,000 income tax band increase would cost €460m, officials say

Tax Strategy Group papers outline the cost of proposed tax measures ahead of Budget 2027 and highlight reliance on income tax receipts

Tánaiste and finance minister Simon Harris has said he is “positively disposed” towards increasing the tax bands, as has been done in recent years. Picture: PA

A €2,000 increase to the higher rate of income tax threshold would cost the Government €460m, consuming almost one-third of the €1.5bn tax package planned for this year's Budget, according to newly published Department of Finance papers.

The department on Thursday published the Tax Strategy Group (TSG) papers, which show the measure would cost €460m in the first year and €525m annually thereafter.

Tánaiste and finance minister Simon Harris has said he is “positively disposed” towards increasing the tax bands, as has been done in recent years. 

However, during Wednesday's publication of the Summer Economic Statement, Mr Harris also made several references to indexing the tax system, noting that the approach is used in other European countries.

The TSG papers state that full 1% indexation of the income tax system would cost around €255m in the first year and €290m in a full year.

The papers also note that Ireland's income tax receipts are “heavily reliant on a relatively small cohort of taxpayers”.

“The narrowness of the income tax base reflects the progressivity of the Income Tax system as it ensures that the burden of taxation falls most heavily on those with a higher ability to pay,” the papers state.

Income tax receipts have performed strongly since the reopening of the economy following the pandemic, increasing by 55%, or €9.6bn, from €17.4bn in 2020 to €27bn in 2024.

The papers estimate that in 2026, of approximately 3.49 million taxpayers:

• The top 1% (around 35,000 people) earning more than €303,900 will contribute 22.8% of income tax and USC receipts.
• The top 5% (around 175,000) earning more than €150,600 will contribute 47.1%.
• The top 10% (around 350,000) earning more than €109,500 will contribute 62.1%.
• The top 20% (around 698,000) earning more than €74,500 will contribute 78.5%.

The papers also highlight the continued growth in corporation tax receipts, which increased from just over €6.8bn in 2015 to more than €32.9bn in 2025.

"This growth has become more pronounced in recent years, with CT receipts more than doubling since 2020," the papers add.

However, they warn that the strong performance of corporation tax has increased the risk of relying on “volatile and unpredictable” receipts to fund permanent increases in public spending.

The papers also suggest there is “scope” to introduce a French-style weight-based vehicle tax in Ireland. 

Such a tax could initially apply to petrol, diesel and hybrid vehicles, with the option of extending it to battery electric vehicles over time as the national fleet transitions. 

No estimate is provided for either the potential cost to motorists or the revenue it could generate.

On inheritance tax, the Department said Revenue estimates that increasing the lifetime tax-free threshold for all acquisitions to €460,000 would cost approximately €537m.

The papers also estimate that extending the 9% VAT rate to cinemas, certain musical performances, fairgrounds and amusement parks would cost €22m annually, while reducing the VAT rate on bicycles to 13.5% would cost €7m a year.