Declan Breathnach (Louth, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

144. To ask the Minister for Finance if his attention has been drawn to the fact there is an unfair anomaly for persons earning just over the universal social charge threshold amount of €13,000 whereby they are charged USC on the full amount, for example, 0.5% on the first €12,012 and 2.5% on the balance up to €18,772; his plans to change these rules for those persons on low incomes so the first €13,000 remains exempt from USC with any balance of income over that amount liable to USC; and if he will make a statement on the matter. [17481/17]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I understand that the Deputy is referring to the step effect which occurs when a taxpayer becomes liable to the Universal Social Charge.  Individuals with USC-liable income of less than €13,000 per annum are exempt from USC, but once that threshold is exceeded, USC is payable on all relevant income.

While step effects are never ideal, they are often a feature of tax systems with exemption thresholds, as the application of a tax on this basis allows those with incomes below the threshold to be supported by means of the exemption, while also achieving the required yield from the tax.  The Deputy may be aware that both the Income Levy and the Health Levy, which were replaced by the USC, also had step effects.  The Health Levy in particular had a significant step effect of €1,040 per annum, or €20 per week, when weekly earnings exceeded €500.

As the USC step occurs at a low income threshold and a low tax rate, its effect is much less significant than the steps of the two levies it replaced.  In 2016, the USC step was just under €150 annually, or €2.88 per week. The Deputy will be aware that in Budget 2017, I halved the rate of USC applying on the first €12,012 of income from 1% to 0.5%, and reduced the rate of USC on the next €6,760 of income from 3% to 2.5%.  Therefore Budget 2017 has further reduced the USC step to just under €85 annually, or €1.63 per week.

I would also point out that exempting the first €13,000 of income for USC for all taxpayers would have significant cost implications. It is estimated that the full-year cost of exempting the first €13,000 of income from USC for all taxpayers, with USC applying at current rates on amounts above €13,000, would be approximately €175 million.

The current Government has committed to continuing the process of phasing out the USC in future Budgets.  It is intended that this will occur as part of a wider medium-term income tax reform plan that keeps the tax base broad, reduces excessive tax rates for middle income earners and limits the benefits for high earners.  In this regard the Income Tax Reform Plan developed for consultation with the Oireachtas and published by my Department in July last year, may be of interest, and is available at the following link: www.finance.gov.ie/sites/default/files/Income%20Tax%20Reform%20Plan-FINAL_0.pdf.