More than 1 million workers will not pay income tax this year

More than one million workers won’t pay any income tax this year, according to figures from the Revenue Commissioners, as the number of tax exempt income earners approaches 2007 highs.

Estimates from the Revenue for 2018 indicate that some 956,200 tax “units” – a term that includes both individuals and jointly assessed couples – won’t pay any income tax this yea, despite earning an income.

These figures do not refer to those on State pensions or the long-term unemployed, but those who actually earn an income but not enough to pay income tax on it. Single earners must pay income tax on earnings of €16,501 or more.

The number of tax-exempt earners is up by 35,500 “units”, or about 4 per cent on last year, which means that more than one in three Irish residents (37 per cent) who earn an income will be exempt from paying income tax on it.

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The estimates mean that the number of earners exempt from income tax next year could surpass Celtic Tiger highs of 984,774 tax units.

The figures also show that 769,800 people won’t pay the universal social charge (USC) this year. This is levied on incomes of €13,000 or more. This cohort is up 21,500 on last year.

When combined, the Revenue figures show that around 769,800 income earners will pay neither income tax, nor the USC in 2018, accounting for 29 per cent of all those who have an income. This figure is up on 2017 in absolute terms, but as a proportion of all income earners has fallen back from 30 per cent last year.

Tax forecasting model

Revenue’s figures for 2017 and 2018 are based on estimates from its tax forecasting model, using the latest actual data available. A spokesman says they are provisional and may be revised, with estimates for 2019 due to be published at the end of July.

Removing people from the tax net has long been a public policy goal. Back in 2010, for example, 45 per cent of income earners paid no income tax. While the introduction of the USC considerably broadened the tax base, its impact on the low paid has been reduced in recent years by raising the level at which the charge kicks in.

This approach differs from international norms. Ireland imposes a far lower tax burden on the lower paid than other countries do. In Germany, for example, figures from the Irish Tax Institute show that a person on a salary of €18,000 will give up more than €4,700 in income tax. In Ireland a person on that income would lose just €510.

Income tax and USC are not the only taxes working people face. PRSI as well as indirect taxes, such as VAT, excise duties and levies are other burdens on people’s incomes.

Upward pressure

Given inflation and the overall upward pressure on earnings, if the Government wants to keep the same number of people out of the tax net it may have to make a move in this year's budget to raise the level at which taxes kick in. Minister for Finance Paschal Donohoe is expected to have about €800 million to play around with come budget day, with about €270 million available for a tax package.

Pushing up the threshold at which people enter the USC net could be one option. If the Government opts to increase the threshold by €1,500 to earnings of €14,500, for example, it would have a full year cost of just €8 million. This is significantly less than the estimated cost of €195 million to keep more people out of the higher tax bracket by pushing up the band by about €1,000.

How many income earners pay no income tax?

2006 884,822

2007 984,774

2008 980,919

2009 947,023

2010 947,023

2011 825,707

2012 843,053

2013 838,164

2014 857,394

2015 893,665

2016 862,300

2017 920,700*

2018 956,200*

Source: Revenue Commissioners

* estimated