Large numbers want income tax bands widened but confused about what exactly that means

LARGE numbers of people are in favour of the Government indexing the income tax bands in the Budget, but there is confusion around what this means.

A survey carried out by Taxback.com found that three out of 10 people would support a widening of the tax bands.

But nearly half of those surveyed were unsure of what exactly this entails.

Indexing the tax bands means allowing people to earn more before they are taxed at the higher rate.

This is to take account of higher inflation and to stop those getting a pay rise having most of it eaten up by income taxes.

At the moment taxpayers can earn €35,300 at the 20pc income tax rate. Earnings above this are then taxed at 40pc.

The personal tax band has not been adjusted since 2019.

Tánaiste Leo Varadkar has suggested measures to raise personal tax bands in line with inflation will be included in Tuesday’s Budget.

If there is no adjustment in the tax bands then someone earning €40,000 who gets a 2.5pc pay increase, or an extra €1,000 next year, would lose over half of that to income tax, universal social charge (USC) and PRSI, Mr Varadkar said.

Adjusting the bands would let them take home between €750 and €800 of the pay rise.

But the terminology is proving to be confusing for people, with four out of 10 unsure of what it means to index-link the tax bands.

Consumer tax manager at Taxback.com Marian Ryan said decision makers need to stop using complex terminology when it comes to describing planned Budget measures.

She said this was important to ensure those who will be affected the most can have some understanding of the impact of such changes to their day-to-day life.

“The personal tax bands have not been adjusted in this country since 2019, when it increased from €34,550 to €35,300.

“This means that, in effect, price rises that have occurred since then, have directly reduced the spending power of workers,” Ms Ryan said.

She said it was necessary for people to be able to have more of their earnings taxed at the lower rate to make up for surging price rises.

The current rate of inflation is 2.8pc, but energy costs, transport costs, and the price of eating out have all risen by multiples of the overall rate of inflation.

Ms Ryan said: “So, a worker’s financial capacity to afford these goods and services will be down on previous years even if the band is increased.”

However, she said the bigger issue is that increasing the current threshold amount of €35,300 in line with inflation will have no positive impact on anyone earning less than €36,288.

This is because any change will only benefit those whose earnings exceed the threshold as they pay the higher rate of tax.

“It could be argued that it’s lower income workers who have a greater financial need for their spending power to increase in line with inflation.”

The Taxback.com research found that 45pc of the 2,200 people surveyed some 45pc do not fully understand what tax indexation means.

Some 37pc said agreed that tax indexation should be introduced.

But 18pc said Finance Minister Paschal Donohoe should leave the tax bands as they are.