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Sunday, 21st April 2024
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Individualisation arrives Back  
The controversial individualisation proposal of the budget has been reduced to boring technical detail in the Finance Bill. So too has the post-budget IEP3,000 sweetener designed to placate the more numerous voting sex.
Where it comes from

Individualisation, and the sweetener, are all effectively about what is known as the standard rate band. That is that part of a person’s income which is taxed at the standard rate of income tax (currently 24%) rather than the higher rate of income tax, which is currently 44%. There is also a part of a person’s income which is taxed at 0%, ie that part which is covered by the individual’s personal and other allowances but that is not involved in individualisation.

The Supreme Court decision in the Murphy case held that a married couple could not be taxed more severely than an unmarried man and woman in similar circumstances. Since then married couples have had the option to either each of them be taxed as if they were not married, or be jointly assessed. Where they are jointly assessed the partner who is assessed is treated as receiving all of the income of the couple, and as being entitled to all of the allowances of the couple.

He or she is also treated as having twice the standard rate band (ie the portion of income to be taxed at the standard rate) as a single person would have.

The Bill proposes

The Minister’s budget proposal could be broadly summarised as saying that he froze the position regarding doubling of standard rate band for the jointly assessed spouse as it was on budget day (a band of IEP28,000, being twice the then individual’s band of IEP14,000). He also increased the individual band up to IEP17,000 on budget day. Since then however his thinking has advanced further and the Finance Bill reveals a more complex situation.

It introduces a special carers allowance of IEP3,000, given as a tax credit at the standard rate of tax (and therefore no different to an increase in the standard rate band of IEP3,000). It also introduces for a married couple with two incomes an additional standard rate band increase of a figure that can vary between zero and IEP6,000, depending on whether both spouses have income, and the size of the income of the spouse with the lowest income.

Hard choices

The result of all of this is that a married couple find themselves facing a menu of choices as to how they will be taxed.

They may be jointly assessed and receive a standard rate band of IEP28,000, increased by a further amount of not more than IEP6,000. That increase will be available if and only to the extent that both spouses have income. The addition to the standard rate band cannot exceed the income of the lower paid spouse, and it cannot exceed IEP6,000.

Example

John and Mary are a married couple living together. If John only has income, and Mary has none, under this choice they would receive a standard rate band of IEP28,000 only. If however Mary also has income, the standard rate band will be increased by the amount of Mary’s in-come, but the increase may not exceed IEP6,000.

If Mary presently has no income, there will be an incentive on Mary to obtain such income. She might obtain it by taking up low paid or part time work. Of course it would be nicer for her if she obtained high paid full time work but the incentive runs out at income of IEP6,000 per annum.

This addition to the standard rate band is available regardless of the type of Mary’s income. It can be employment income, or it can be investment income, or it can be trading income. If John at present was the only one of the couple in employment, it would be prudent for him to ensure that the family’s investments are held by Mary so that the family’s investment income arises to her. That would entitle the couple to an increase in the standard rate band by the amount of Mary’s investment income, not exceeding IEP6,000.

As can be seen, the addition to the standard rate band in this instance is not in any way related to such matters as additional expenses incurred by being in employment, nor is it related to the couple having children and therefore incurring creche expenses if both spouses are employed. All that is required is that they both have income.

Farms and shops

Many couples run a farm, or a shop, or other small business together. If the enterprise is owned entirely by one of the couple, so that all income from it arises to that spouse, with the other working spouse not in receipt of income in their own right, the couple would not be entitled to the IEP6,000 increase in the standard band. To get the increase it would be necessary that they formalise the arrangement so as to make both spouses partners sharing in profits, or one spouse an employee of the other, with a salary. Such arrangements involve PAYE (in the case of an employment) and PRSI implications. It can be foreseen that many couples in this situation will fail to formalise arrangements. It would be surprising if some concession is not introduced in this area and indeed some remarks by the Minister prior to the publication of the Finance Bill would have led to the expectation that some concessions would have been made available. To date however they have not been formalised.

Sweetener for “carers”

The second choice available to a couple is to take the standard rate band of IEP28,000 (unchanged by the budget or Finance Bill proposals) and in addition to claim a carers allowance of IEP3,000. This allowance is given as a tax credit at the standard rate of tax and therefore is no different to an increase in the standard rate band by an amount of IEP3,000.

If this option is elected for, the first option described above, an increase in the standard rate band of up to IEP6,000 cannot be claimed. The carers allowance is available only if one of the couple is engaged during the tax year caring for one or more dependent persons. A dependent person is a child, or person aged over 65, or an incapacitated person. If the person being cared for is a relative, they must live not more than two kilometres away from the couple. If the person being cared for is not a relative, then they must reside with the couple. In relation to any person requiring care, only one couple can claim the carer’s allowance.

The legislation does not lay down any particular degree of care to be provided to the dependent person. It does not lay down any minimum time periods which must be spent in caring for the person, or indeed in any way define what “caring” means.

The IEP3,000 allowance will be available only if the spouse providing the care does not have income in excess of IEPP4,000 per annum. There is some marginal relief where the income is between IEP4,000 and IEP5,000 per annum.

The modern couple
The couple may elect to be assessed separately, in the same way as if they were not married. In such a case each spouse will have a separate standard rate band of IEP17,000. If the taxable income of one spouse is greater than IEP17,000 so that they are exposed to tax at the higher rate, and the second spouse has taxable income of less than IEP17,000, the lower paid spouse cannot surrender the unutilised portion of the standard rate band to the higher paid spouse. It is wasted.

As can be seen from the above, a couple both of whom have income have a good chance of enjoying a standard rate band of IEP34,000 whether it is made up of IEP28,000 increased by IEP6,000 (joint assessment) or two bands of IEP17,000 each in separate assessment. Where one spouse has little or no income, then the effective amount of taxable income to be taxed at the standard rate is not likely to exceed IEP31,000. It is paradoxical that the couple with the lower income may enter the higher rate band sooner than the couple with the higher income, but there is an intention behind the system to give an encouragement to married couples to both earn income.

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