Michael McGrath (Cork South Central, Fianna Fail)
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151. To ask the Minister for Finance his views on the impact of tax relief changes introduced in budget 2014 on private medical insurance premiums; and if he will make a statement on the matter. [1888/16]

Michael Noonan (Limerick City, Fine Gael)
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Since 16 October 2013, tax relief for medical insurance premiums has been restricted to the first €1,000 per adult and the first €500 per child insured. Any portion of premium paid in excess of these ceilings no longer qualifies for tax relief.  Prior to this, income tax relief for medical insurance premiums was provided at source, at the standard rate of income tax, on the entire premium amount regardless of cost. Therefore, the State was paying 20% of the cost of all private medical insurance premiums.

The cost of Income Tax relief in respect of medical insurance increased significantly in the years leading up to the introduction of the caps in Budget 2014, estimated at €404 million in 2011 and €448 million in 2012. Despite the increasing cost of the relief, the numbers insured were estimated to have reduced by approximately 150,000 over the same period, while at the same time the level of medical cover decreased on some policies. Against this background the increase in costs was unsustainable. If the relief had remained unchanged and the trend was to continue, it was estimated that the cost of the relief would have increased to approximately €1 billion per annum by 2020.

Relief through the tax system effectively means that some taxpayers who could never afford private health insurance, or who had to give up their policies due to personal circumstances, provide financial support to those individuals who can afford such insurance. In my view, taking into account the increasing costs and reducing coverage outlined above, it was unfair and unsustainable to allow unrestricted tax relief on private medical insurance premiums, particularly at a time when the general population has contributed so much to repairing the public finances. The ceilings ensure a level of continuing support via the tax system for those who purchase medical insurance policies, while reducing Exchequer exposure to more expensive policies.

It should also be noted that the 2009 Commission on Taxation recommended the retention of medical insurance relief, but that it should be limited. The introduction in Budget 2014 of an upper ceiling on the amount of medical insurance premiums that qualify for tax relief achieved this recommendation. 

The potential yield to the Exchequer in 2014 of restricting tax relief on private medical insurance policies to the first €1,000 of a premium is tentatively estimated to be in the order of €151 million. This yield takes into account the difference between the actual cost of the relief in 2014 and the potential cost of an unrestricted relief, taking into account the increased numbers of policy holders following the introduction of lifetime community rating in 2014.

When the cap was introduced in Budget 2014, it was estimated that the yield to the Exchequer would be approximately €94 million in the first year and €127 million in a full year.  The reduction in overall Exchequer cost from the last full year in which unrestricted relief was available (€448 million in 2012) was €94 million in 2014 and €123 million in 2015, based on the current estimates for Exchequer costs in those years of €354 million and €325 million respectively.   On this basis, I am satisfied that the projected Exchequer yield in Budget 2014 was accurate, and that the current caps are functioning appropriately and as intended.