The spectre of inflation and a focus on energy costs and supply forms the backdrop to this year’s budget and the government is expected to deliver a cost-of-living budget to deal with the growing challenges. Tom Woods, Head of Tax at KPMG considers some of the taxation issues.

Inflation and interest rate rises have dominated the headlines recently. However, the economy has been performing better than might have been expected with exchequer receipts to the end of August €10.4 billion ahead of last year. While timing may be a factor and thus reduce the yield as we come to the end of 2022, it has given the government some room for manoeuvre.

It’s in this context that budget package is expected to include tax measures worth €1.05 billion - double the package originally planned. For the sake of comparison with the two pandemic budgets, in 2022 the amount was €500 million and in 2021 it was €270 million.

Personal taxes

The government has indicated that personal tax measures will play a key role in the budget in delivering support to households facing higher utility and food bills. The recently published Tax Strategy Group (TSG) papers considered the arguments for and against an intermediate rate of 30% to ease the burden on taxpayers before they hit the higher rate of 40%.

The TSG noted that a third tax rate could pose administrative challenges for Revenue and payroll operators while adding costs for employers trying to change payroll systems over the short time between the budget and the new year when new tax measures come into effect.

Furthermore, the TSG projects that an intermediate rate would help one million or 35% of the personal taxpayer base, leaving the other 65% without any support to deal with the cost-of-living crisis. 

KPMG’s pre-budget submission

In our Pre-Budget Submission to government, we proposed the statutory indexation of tax credits and rate bands as well as indexing USC and PRSI bands as the best way to deliver support to personal taxpayers as indexation can help moderate the impact of inflation and put less pressure on businesses to increase wages.

A full 4% indexation of the income tax system would cost €843 million helping 2 million taxpayers. That could translate to a tax saving of €46.60 per month for a single person and €57.90 per month for a single-income married couple. To put the saving into context, a recent price increase by a utility supplier added €37.20 per month to an average household’s electricity bill and €42.99 per month to their gas bill.

This saving would go some way to compensate for these increases, but targeted supports may also be necessary to support the more vulnerable. 

"Budget 2023 is set to continue the pattern of carbon tax increases ..."

Tax increases

Budget 2023 is set to continue the pattern of carbon tax increases in accordance with tax law introduced in 2020. From budget night, an additional €7.50 per tonne of C02 emissions is set to apply to diesel and petrol, while an increase for heating fuels takes effect in May 2023. For a typical 60 litre fill car, the additional carbon tax is projected to add €1.28 to the cost of petrol and €1.48 to the cost of diesel. It is expected that the extra carbon tax will raise €118 million for the Carbon Tax Fund set up to support those in fuel poverty, to support the transition to more energy-efficient homes and support the agri-sector in its green transition.

A temporary reduction in the rate of VAT from 13.5% to 9% on the supply of gas and electricity applies since May and is set to revert to 13.5% on 31 October. The cost of the six-month VAT reduction is estimated at €46 million and would cost more than this again if extended for another 6 months over the winter. The cuts to excise duty on petrol and diesel put in place in March, at a cost of €400 million, are due to expire on budget day. It is possible that these measures will also be extended given the significance of the cost rises.  

What would we like to see in Budget 2023?

Our pre-budget submission sets out the case for indexation to help taxpayers facing inflationary pressures. To reinforce Ireland's appeal to FDI and support the domestic economy, we suggested an enhanced R&D relief, particularly where R&D supports the transition to the green economy.

We also suggested using tax policy to support private landlords to stem further reductions in residential rental stock, we advocate a temporary reduction in VAT to accelerate the supply of affordable housing and government could consider a rental credit to help tenants. The long-term plan, however, needs policies supporting a significant increase in supply.

Tax rules under the Employment Investment Incentive Scheme should be enhanced to help SMEs access much-needed risk capital, and the Key Employee Engagement Programme needs reform to help SMEs attract and retain talent.

"...indexing tax credits and bands is the best option to ensure that tax bills are fairly adjusted for inflation."


Government is highly aware of the danger of possible tax measures adding to inflation. In our view, indexing tax credits and bands is the best option to ensure that tax bills are fairly adjusted for inflation. Ireland also needs taxes to remain competitive for FDI purposes considering impending international tax reform, and domestic businesses need targeted tax enhancements to help their growth ambitions. Targeted tax measures can also help resolve the housing crisis while supporting environmental initiatives.

Tax receipts have grown by €9 billion or 15% over the last three years and despite the pandemic, Brexit and a large range of geopolitical and other risks, Ireland has emerged in relatively good economic health. While there are vulnerabilities in the tax base to be addressed to create more stability, the government deserve recognition for implementing tax policies that supported growth and enabled significant support for society at times of crisis, whether pandemic or war-related.

While there are important issues that still need to be resolved, we should not lose sight of what has been achieved and the level of support that Budget 2023 can deliver. 

Get in touch

At KPMG we understand the pressure business leaders are under to get it right. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please contact Tom Woods, Head of Tax. We’d be delighted to hear from you.

More in Tax