Call for tax on overtime earnings to be capped at 20% in budget measure

Kerry TD Michael Healy-Rae said move was part of drive to 'make working more worthwhile for the people who are prepared to work more'

Michael Healy Rae has written to Tánaiste and finance minister Simon Harris seeking a meeting ahead of the budget to formally put the proposal to him. File picture: Leah Farrell/ RollingNews.ie

Overtime earnings should be subject to a flat 20% income tax rate, Kerry TD Michael Healy-Rae has said, pushing for the measure to be included in the budget.

The former minister said the move was part of a drive to “make working more worthwhile for the people who are prepared to work more”. He has written to Tánaiste and finance minister Simon Harris seeking a meeting ahead of the budget to formally put the proposal to him.

Mr Healy-Rae commissioned the independent Parliamentary Budget Office (PBO) to examine and cost the proposal earlier this year. Its analysis estimates introducing a flat 20% marginal income tax rate on overtime earnings would result in €238.8m in income tax revenue forgone in its first full year in 2027.

The PBO's analysis said there was a "significant limitation in the availability of data" for overtime payments and researchers "had to make simplifying assumptions to carry out this costing". They estimated the average overtime earnings among those whose earnings would exceed the standard 20% income tax rate band.

They based it on aggregate statistics from the 2022 Structure of Earnings survey provided by the CSO on overtime earnings in a typical week of October and found for a full year, the cost of a flat 20% tax on overtime would be €238.8m in 2027, rising to €331m by 2031.

Mr Healy-Rae said the proposal should now form part of the serious discussions around the forthcoming budget.

We have to get back to a very simple principle in this country — if you work more, you should see the benefit of working more. We must make work pay.

“There are people the length and breadth of Ireland who are prepared to put in extra hours, stay on for an additional shift or give up additional time to work overtime. But when that overtime falls into the higher income tax band, too much of the reward for those extra hours is taken away.”

The PBO analysis also acknowledged its costing could not fully account for how workers might change their behaviour if overtime became more financially attractive. It said there was high behavioural uncertainty and recognised a flat 20% rate could incentivise more people to undertake overtime. It further noted the income tax collected from this additional overtime would reduce the net cost of the policy.

Mr Healy-Rae said this point could not be ignored when the proposal is considered by the Department of Finance.

While no details of the budget's €1.5bn tax package have been decided, Mr Harris has indicated tax cuts are likely. Mr Harris said the idea of continuing to increase the threshold at which the higher tax rate is paid is “logical”.

"If you work a few hours extra, you get a promotion, and you decide to work harder, then you find yourself disproportionately disadvantaged."