Finance Bill 2014

It is hard to believe that only three weeks ago on the eve of the budget the newspapers were full of concern that there might be a giveaway budget that could jeopardise the national recovery or that not enough would be given away.  In the event, every single taxpayer and welfare recipient will be better off as a result of this budget, albeit by a modest amount.  It is not the amount that is significant.  It is the fact that, after so many difficult years, we at last have a budget that does not take more from us than it gives.  The budget’s thrust was very much focused on increasing employment and securing the recovery, ensuring that progress we have made painfully over the past four years is sustained in the future.  While paying ourselves more in pay and benefits may be a short-term stimulus to the economy, if it is done at the cost of more borrowing, then it can only undo what has been achieved and will send us into an ever downward spiral.

 The measures announced on budget day and included in the Finance Bill are both prudent and proportionate.  Changes in tax and the universal social charge, USC, taken together ensure every worker’s pay packet increases.  This is true of both PAYE workers and the self-employed.  There is considerable upset, however, among the self-employed about the onerous 11% USC rate.  It was introduced and increased to ensure there was no disproportionate benefit to the self-employed with incomes over €100,000 compared to those on PAYE and has its roots in the changes to the PAYE ceiling back in 2011.  Notwithstanding the logic of it, the optics are not good.  It appears to the self-employed that they are being punished relative to the PAYE worker on a similar income.  The assumption the self-employed had a tax advantage prevails and may have been true in the past.  The rules, however, changed and Revenue has become far more efficient in collecting from the self-employed.  The rule has changed also in that they are paying tax in advance rather than after the event.

 Over the years of the recession, we lost an awful lot of our entrepreneurs; some of them were wiped out forever.  We need now to grow and nurture a whole new generation of employers, however small the size of their business.  Without them, there will be no new jobs.  No matter how logical or justified this higher rate of USC is, it creates the perception that the self-employed are being penalised in some way and not valued.

As we know, when it comes to investment decisions, optics and perception are all-important.  The bottom line is that the effective rate of tax for the self-employed is 44.3%, while for PAYE workers it is 42.3%.  The marginal rate of tax for the self-employed is 55%, whereas for PAYE workers it is 52%.  I know it will not happen in this budget, but I ask the Minister to examine as soon as possible a rebalancing of the mix of USC and taxes in a more transparently fair way, because, as I said, the optics are equally important.

 The Minister should also reinstate the sunset clause by way of an amendment to this Bill.  A sunset clause was included originally, which recognised the penal, onerous and, by implication, temporary nature of this tax.  While that clause expired this year, it was reinstated for PAYE workers but was removed completely – and there is no mention of reinstating it – for the self-employed.  I strongly urge the Minister to do so this year.  It would send out the right signal that this is not going to be a permanent tax.  

 As regards pensions, I welcome the measure whereby the requirement to take 5% out of approved retirement funds, ARFs, annually is being reduced to 4%.  I hope we will see a further decrease to 3%.

 I want to make a case for the many people who are on defined benefit pension plans but are still working, and who now see almost all defined benefit pensions being wound up.  Their funds are being used to purchase personal retirement bonds.  On retirement, an employee whose bonds derive from a defined contribution scheme can either buy an annuity or transfer their money to an ARF.  Those on defined benefit schemes, however, find that they must purchase an annuity on retirement.  Therefore, the latter group does not have the same flexibility.  Purchasing an annuity is an expensive option, particularly at the moment, because interest rates are so low that people must spend a huge amount of their fund just to get a meagre pension.  I ask the Minister, therefore, to examine the possibility of giving the same flexibility to those on defined benefit pensions that those on defined contribution schemes have.

 I welcome the reduction from 5% to 4% in the mandated withdrawal from ARFs each year.  The fact that people have to take out 4% each year will ensure that there is no loss to the Exchequer, because the tax will be paid annually at 4%.

 Notwithstanding what I said about the USC, the overall budgetary thrust is very much pro-business and pro-investor.  It strengthens and extends the scope of many of the existing measures we took last year.  Particularly welcome is the publication of the roadmap for tax competitiveness and the concrete commitment to a range of actions to give certainty to the business community, which is so important.  Doubts about the 12.5% corporation tax rate, together with the reputational damage of the “double-Irish” tax arrangement, could, if they were allowed to persist, have been catastrophic for inward investment.  Therefore the public commitment to maintain the 12.5% rate and introduce automatic tax residency for companies no matter where they come from – if they are incorporated here – is essential and timely.

 On balance, this budget is proportionate and of benefit to everybody.  Based on the certainty it provides, we can look forward to better budgets in