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Finance Act 2011

The Finance Act 2011 introduced significant adjustments, including a 10% reduction in standard rate bands and basic tax credits. While there are no changes in income tax or PRSI rates, the Universal Social Charge (USC) replaced previous levies, affecting most income including gross income but excluding social welfare and certain other earnings. Additional amendments impact benefits-in-kind (BIK), termination payments, pension limits, and energy efficiency relief. These changes require careful consideration for personal and business financial planning.

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Finance Act 2011

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  1. Finance Act 2011 Summary of Measures Introduced

  2. Some of the Basics • Standard Rate Bands reduced by 10% • Basic tax credits reduced by 10% • Age exemption limits reduced by 10% • No changes in actual rates of income tax • No changes in actual PRSI rates • However, employee ceiling abolished

  3. Universal Social Charge • Income Levy abolished along with Health Levy • Both replaced by Universal Social Charge • Similar but not identical to Income Levy • First €10,036 @ 2% • Next €5,980 @ 4% • Balance @ 7% • New 10% rate for incomes over €100,000 (*)

  4. Universal Social Charge • Applies to: • Gross income including exempt income • Does not apply to social welfare and similar payments • Does not apply to DIRT income, CU dividends and certain other investment income • Calculated after Losses/Cap. All. for Case I/II

  5. Universal Social Charge • Calculated on Case I/II after Capital Allowances • Calculated on Case V before Capital Allowances • Does not apply to Deposit Interest • Does not apply to Tax Free Termination • Does apply to most tax free income (e.g. artist, woodland etc)

  6. Universal Social Charge • No exemption for medical card holders, but reduced rates apply, viz. • Extra rate of 3% applied on incomes over €100,000 – this does not apply to emoluments • Proprietary director is better than sole trader

  7. Universal Social Charge • Paid under self assessment, if using 2010 tax liability for calculating 2011 prelim tax, must be assumed that USC in force in 2010 • Deducted under PAYE • Revenue say that other employment cannot be ignored where more than 1 employment • 3% extra rate does not apply to employment • Overpayment can be recovered • Q&A on revenue.ie for more details

  8. BIK Changes • BIK exemption for payment of professional subs no longer applies • However, Tax Instruction 5.2.9 still applies • Therefore, employer must operate BIK on payment of sub • Employee can get tax relief for sub • Tax credit for Trade Union subs abolished • BIK childcare exemption also removed

  9. Termination Payments • Lifetime Limit of €200,000 introduced • Payments on account of death or disability not subject to cap. • Top slicing still in place • Pre termination bonus for long serving employees may no longer be attractive

  10. Other Items Abolished • Tax free status of patent income both for income itself and dividends from such income • Lifetime limit of €6,350 for subscription for shares in employer • Exemption in relation to approved share options

  11. Interest as a Charge - Individuals • Abolished for new loans or replacement loans effected from 7 December 2010 • Phasing out of relief for interest on existing loans: • 2011 – 75% of interest incurred allowed • 2012 – 50% of interest incurred allowed • 2013 – 25% of interest incurred allowed • 2014 - Abolished

  12. More bad news…. • Relief for 3rd level fees – no relief on first €2k of fees for fulltime or €1k fees for part-time • Phasing out of rental tax credit • Artists exemption limited to €40,000 p.a. • Filing deadline for non self assessed now at 30 September

  13. Relief for Energy Efficiency • Relief at standard rate • Applies to occupied residences only • Installer must have C2/tax clearance • Limit of €10k/€15k for single/married • Does not apply to commercial premises • Landlords (except rent a room landlords) cannot claim credit

  14. Restriction of Property Based Allowances • Subject to commencement order • Economic assessment • If implemented will be effective in year of implementation

  15. Pensions • Maximum amount of Income on which pension can be based is €115,000 • This is effective from 1.1.11 for both 2010 and 2011 • Maximum tax free lump sum on retirement is €200,000 • Next €375,000 taxed at 20%

  16. Pension • Maximum capital value of pension at retirement set at €2.3m (20 x €115,000) • For people starting out on pension they have little chance of achieving this amount • No changes to contribution amounts from company • EE PRSI relief no longer available on direct contributions; ER PRSI relief halved

  17. Pensions • At retirement excess over Standard Fund Threshold liable to tax at 41%, with withdrawals also being liable to tax • Difficult to project forward • Defined benefit pensions capitalised at 20x • For clients whose funds already in excess of €2.3m, they can mark this higher level before 7 June 2011

  18. Pensions • Annuity model can be avoided if guaranteed income > c.€18.5k • AMRF can be converted to ARF once threshold exceeded • Difficulty with early retirement • 3% imputed distribution now increase to 5% - will pension last retirement? • 5% does not apply to PRSA

  19. False Claims/Refund • Incorrect claims for allowances, credits etc now liable to penalty of €3k • Penalty applies to agents who “knowingly or carelessly” assist in such claims • Where refund is made to agent/other person, Revenue can now seek repayment of that refund from agent/other person if found to be paid in error

  20. RCT Changes • Not yet implemented • 3 new bands for RCT • 0% - effectively C2 card holder • 20% - substantially compliant in last three years • 35% - default position, non registered, poor compliance, deductions not sufficient to discharge liabilities

  21. RCT Changes – How will it work • ROS will be an integral feature • New contract details must be filed on-line • Before payment made, notification of intention to pay must be filed with Revenue • Revenue issue deduction authorisation (0%,20%,35%) • Cannot operate another rate when paying subcontractor (to avoid fraud)

  22. RCT Changes – How will it work • Pay and file of returns • Surcharge for late filing • RCT deducted no longer be refunded during year • Refund released once notice of assessment issues • Revenue can still withhold if not satisfied • Regulations awaited

  23. Employment & Investment Incentive Scheme (EISS) • Will replace current BES • Subject to EU approval and commencement order • Much more widespread, exclusions relate to trade (not defined), businesses in taxed based properties, dealing and development and financial services, professional services companies • Approval process set to become more straightforward

  24. EISS • Relief granted at 30%, not 41% • Extra 11% will be granted to investor after 3 years if company has increased employment numbers or R&D spend • Holding period reduced from 5 years to 3 years • Amount that can be raised is €10m from €2m • Amount that can be raised in any 12 month period is €2.5m from €1.5m • Maximum relief is €150,000 p.a. – high earners

  25. Corporation Tax • Some changes to start up companies • Currently no tax if CT liability is less than €40,000 p.a. for first three years and reduced tax for liabilities between €40,000 to €60,000 • Extended to 2011 • Existing/connected trades excluded • Ceiling of €5,000 ER PRSI per employee – but you don’t exclude ER PRSI of non qualifying

  26. Interest on Loans - Companies • New restrictions introduced for intra group acquisition of assets • Some tightening up of rules regarding directorships etc • For most cases, rules remain the same

  27. CAT Thresholds • Group A - €332,084 • Group B - €33,208 • Group C - €16,604 • CAT at 25% • Pay and File Dates now 30 September

  28. Stamp Duty • Stamp duty reliefs for residential property abolished • Transfer of site to child – gone • First time buyers relief – gone • Consanguinity relief – gone for residential element only • New rates – consideration less than €1m – 1% • Consideration in excess of €1m – 2%

  29. VAT • No significant change • Reverse charge procedure implemented for scrap metal industry

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