Budget No. 2 2009 - April 2009

In October 2008, when the Minister for Finance Brian Lenihan unveiled a ‘hairshirt’ Budget for 2009, not many people expected that he would have to return with a second Budget, within less than six months. That said, the deterioration in the economy in the meantime, and the worsening state of the public finances left the Minister with no option but to introduce an emergency Budget on 7 April 2009.

We now examine some of the main tax changes of  Budget No. 2 2009, and how they will impact on you.

Income Levy and Health Contribution
There were no changes to income tax rates or bands  in the Budget. Instead the Minister took the easier option of increasing the Income Levy and the Health Contribution Levy, both with effect from 1 May 2009.
Since last January the Income Levy has been charged at 1% of income up to €100,000 per annum, at 2% on income up to €250,120, and at 3% on higher incomes. From 1 May, it is now charged at 2% on incomes up to €75,036, at 4% on amounts from €75,037 to €174,980, and at a whopping 6% on incomes above this latter figure.

The income levy exemption for taxpayers under 65 years will be cut from €18,304 to €15,028 from 1 May 2009. This means that low earners who earn between €289 and €352 per week will now pay the Income Levy for the first time.

In addition to the Income Levy, the Health Contribution levy rates are also increased. This levy will now be 4% on income up to €75,036 and 5% on higher income.

Mortgage Interest Relief
The Budget also provides for a cut in Mortgage Interest Relief.  From 1 May, the tax relief is restricted to the first 7 years of a loan. In  2009, this will affect mortgages taken out in 2002 and earlier.

Landlords
The Budget also includes a curious provision that will affect residential landlords. From Budget Day, the tax deduction on interest incurred on mortgages used to purchase rental properties is being cut from 100% to 75%. This restriction does not apply to interest on loans used to improve or repair a rented property.

Neither does it apply to interest on commercial property.  There are specific, and rather complicated, provisions for mixed commercial/residential properties. Thankfully, the “rent-a-room” relief is unaffected.

This is a strange measure to say the least. It will cause problems for landlords (many of whom have substantial mortgages on their properties), not least in correctly calculating their tax liabilities. It is difficult to see what this measure is meant to achieve, given that many landlords are struggling as rents continue to decrease. It remains to be seen whether this measure is amended or scrapped in future.

DIRT Tax
DIRT tax on deposit  interest increases to 25% from Budget Day, as does the tax levied on life assurance and investment funds which is now charged at 28%.

Capital Gains Tax (CGT)
The rate of capital gains tax is being increased from 22% to 25% with immediate effect.  It is difficult to understand the logic behind this increase, as it is generally accepted that lower CGT rates improve the tax yield, as they incentivise owners to sell properties and businesses.  The halving of CGT rates in the late 1990s generated a bonanza for the Exchequer with a sharp increase in CGT receipts. In contrast, the new CGT hike is likely to depress the State’s revenue from CGT.  Again it will be no surprise if this particular measure is reversed in the future.

Capital Acquisitions Tax (CAT)
The rate of CAT on gifts and inheritances taken on or after 8 April 2009 also increases from 22% to 25%, again with immediate effect. In addition the exempt thresholds for CAT are cut by a fifth.  

As is the case with CGT, these changes will serve as a powerful disincentive to people to gift properties to children or other family members within their lifetimes. As such they are again more likely to weaken than strengthen the Exchequer receipts from CAT.

 Life Assurance and Pension Policies
A new 1% levy on life assurance and pension payments will apply on payments made on or after 1 June 2009. Why people are being discouraged from saving for their old age, and protecting their families from poverty in the event of their untimely demise, is something of a mystery.