Budget 2023 income tax measures are intended to benefit most taxpayers, and will be welcomed by middle income earners in particular, write Robert Dowley and Eoghan Quigley, partners in KPMG

In the words of the minister, Budget 2023 was a cost of living budget, and while much of the measures to help citizens have been effected through the social welfare system, finance minister Paschal Donohoe has chosen the tax and USC system to be part of the transmission for cost of living subsidies.

The minister made specific reference to the recently released Commission on Taxation and Welfare report, as well as papers published this month by the Tax Strategy Group.

He confirmed that he has requested that his department consider a range of recommendations across PRSI, USC and income tax, with a view to developing a medium term road map for personal taxation reform.  Further, the minister has confirmed that the impact of introducing an intermediate third rate of income tax will be considered.

The minister outlined that engagement will be required with the Revenue Commissioners in advance of a policy decision being made and that change could be implemented for January 2024.

The specific measures announced in the minister’s speech are detailed below.

In Association with

Universal Social Charge

For the fifth budget speech in a row, no adjustments have been made to the USC rates. Additionally, no explicit mention was made of the 3% USC levy which applies to certain non-employment income.

The second band of USC has been adjusted to ensure a full-time worker earning the new minimum wage of €11.30 per hour will remain outside of the higher rates of USC. This will be achieved by increasing the ceiling at which the 2% rate applies from €21,295 to €22,920.

The extension of the band will also result in a modest decrease in USC for people with income in excess of these levels. The increase in the minimum wage and the USC band will both apply from 1 January 2023.

The reduced rate of USC for medical card holders who earn less than €60,000 per annum was due to expire at the end of 2022 but has again been extended by a year to the end of 2023. There is also no change in USC for those earning less than €60,000 per annum who are over 70 years of age.

Income Tax

The point at which the higher rate of income tax will apply has increased by €3,200 to €40,000. This is the equivalent of an increase in the band of 8.7%, which is in line with the growth in the consumer price index in the year to 31 August 2022.

This increase should deliver an annual saving of €640 for a single person earning more than €40,000 per annum and up to €1,280 for married couples/civil partners.

The Tax Strategy Group explored the introduction of a third rate of income tax between the current 20% and 40% rates. The introduction of an intermediate rate would need to be carefully considered in terms of its practical impact (e.g. updates to payroll software and Revenue’s own systems). The implications for existing tax reliefs such as pension contributions would also have to be considered.

Nevertheless, the minister appears to be committed to considering its implementation for the tax year 2024.

Tax Credits

The personal tax credit, employee tax credit and earned income credit will each rise by €75, from €1,700 to €1,775. This represents an increase of 4.4% but there was no mention of index linking these credits to inflation or any wage increases.

The minister also provided for an increase of €100 to the home carer tax credit, from €1,600 to €1,700, and the extension of the sea-going naval personnel tax credit to 2023.

Small Benefit Exemption

The tax rules have for several years permitted employers to provide one non cash incentive of up to €500 per annum to an employee without giving rise to a charge to tax where certain conditions are met. This is commonly referred to as the ‘small benefit exemption’.

In a welcome move, the minister has announced an extension to the current relief.

Firstly, an employer will be permitted to provide up to two qualifying awards per annum, and secondly the maximum tax-free amount per annum has been increased to €1,000. This will provide employers with some further scope to reward employees in a tax-efficient manner.

The incentive is often given as a Christmas voucher. Under a financial resolution, this amendment will come into force with effect from 28 September 2022, so the enhanced benefits are accessible in the current tax year.

Key Employee Engagement Programme 

The Key Employee Engagement Programme (KEEP) is a tax relief for share option schemes which commenced in 2018 specifically for employees and directors of certain qualifying SME companies.

The Minister announced in his budget speech that KEEP is being extended until 31 December 2025 and that a number of positive amendments will be made to the scheme.

The relief is being modified to permit the buy-back of KEEP shares by the company from the relevant employee to qualify for the relief.  In addition, the lifetime company limit for KEEP shares is being raised from €3m to €6m.

Some key Finance Act 2019 provisions with regard to group structures and qualifying individuals are being brought into effect. These provisions allow companies who operate through typical group structures to qualify for KEEP and amend the ‘qualifying individual’ definition to also include certain part-time and flexible working employees.

Special Assignee Relief Program

The Special Assignee Relief Programme (SARP) was introduced from 1 January 2012 and is a key component in Ireland’s competitive foreign direct investment offering to attract mobile international talent.

SARP reduces the income tax burden for qualifying expatriate executives for up to five consecutive tax years from first arrival in Ireland.

The minister announced the extension of SARP for qualifying individuals arriving up to the end of 2025, and that from 2023 the minimum base salary for an employee to avail of the relief will increase from €75,000 to €100,000.

Foreign Earnings Deduction

In another positive development, the minister announced an extension of the existing Foreign Earnings Deduction relief until 2025. This relief provides relief from income tax for Irish employees who spend time working in certain qualifying counties.

The extension should hopefully continue to incentivise Irish businesses to develop and expand into new emerging markets.

PAYE Compliance

The Budget also included an announcement that Revenue will undertake targeted compliance interventions with respect to the operation of PAYE by companies. The focus of these interventions is expected to be the operation of PAYE on share schemes, which is a continuation of Revenue’s ongoing review of tax compliance in respect of share option schemes.