The Irish personal tax system should include personal tax reforms to support SMEs, support public policy objectives in areas like housing and sustainability and maintain Ireland’s competitiveness, says KPMG in its submission on Ireland’s Personal Tax System. 

Striking a balance

Ireland is operating at close to full employment. The challenge now for Ireland’s personal tax system is to strike a balance between generating tax revenues for the Exchequer while also incentivising employees to continue to upskill and take on new roles.

Ireland’s marginal rate of personal tax is high by international standards at 52% for employees and is even higher for self-employed individuals at 55%.

The high marginal personal tax rate and the cliff-edge effect in the Irish tax system for taxpayers moving from the 20% income tax rate to the 40% tax rate can deter some workers from pursuing additional income and working extra hours, and it also impacts Ireland’s attractiveness as a destination for talent and foreign direct investment.

Maintaining FDI competitiveness

In KPMG’s response to the Department of Finance’s public consultation on Ireland’s Personal Tax System, Tom Woods, Head of Tax at KPMG, says: “A globally mobile labour market and the impact of international tax reform in the form of BEPS means it’s more important than ever that Ireland’s personal tax regime is competitive relative to what is on offer in other jurisdictions.

The current entry point to the higher 40% income tax band is at a level of income that is lower than the average wage, leading to a squeezed middle. The Government should consider measures such as graduated tax bands and rates below 40% to make Ireland a lot more competitive, and the automatic indexation of bands and credits to protect against the impact of inflation.”

Supporting the SME sector

Reform measures such as graduated rate bands and additional tax rates should also mitigate the cost of job creation for SMEs. Access to capital and talent can constrain the ability of SMEs to scale and grow. The Government’s review of the personal tax system should also consider new income tax reliefs and enhancing current enterprise tax reliefs to stimulate investment in the SME sector.

Tom Woods, Head of Tax at KPMG says “The personal tax system can support SMEs by enhancing income tax relief for investors under the Employment Investment Incentive Scheme and the Start-Up Relief for Entrepreneurs, and for example, by introducing a special income tax rate of 20% on dividends paid by active SMEs.”

Supporting public policy objectives

The review of Ireland’s personal tax system presents an excellent opportunity for the Government to use the personal tax system to help achieve public policy objectives in housing, availability and affordability of childcare, sustainability, and public objectives for a healthier society.

On the issue of housing, Tom Woods, Head of Tax at KPMG says “The shortage of affordable residential property must be urgently addressed, not only for people living here but also if Ireland is to remain attractive for foreign investment. Tax measures that could assist in the resolution of the housing crisis include the reinstatement of mortgage interest relief, reform of the taxation of landlords, and the reintroduction of a targeted and controlled form of Section 23 type relief to promote targeted investment by individuals in the rental sector.”

Get in touch

If you have any queries about our submission above, or how associated issues might affect your business, please contact Olive O'Donoghue or Tom Woods of our Tax team. We'd be delighted to hear from you.

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