In 2016 The Natural Environment Research Council in the UK invited the public to name their latest scientific research vessel, which was costing £200m. This vessel was going to be doing (and currently is doing) really insightful and exploratory work, making new discoveries and so on. Really important, noble and global research for the good of the natural world. In the initial stages the likely suggested winner was names such as ‘Endeavour’ and ‘Poseidon’ etc. Which made sense. However  you can imagine the consternation internally when the public unanimously got behind a viral idea of calling it something rather ridiculous, yet pretty hilarious at the same time. And so it was that the winning vote, by some margin, was ‘HSS Boaty McBoat-Face’!

In the past week we saw the 2019 Budget being released, and depending on your level of interest you may have either read every single iota of info in it, listened-out for any major bits that will impact you, or paid no heed to it at all. Each to their own. For me at least, The Budget is one of these things that happens every year (as far as I’m aware) and which the media latch onto and utilise to create a good week’s worth of material and supplements and ‘special reports’ etc. But for many of us, The Budget is something that largely happens in the background, and has little impact on our overall financial lives or indeed financial planning. For many the drama of the Finance Minister somberly walking onto the steps of the Dail with his or her brief-case looking all serious is all a bit much, it is over-dramatising a budgetary process that any prudent government in any nation attempts to do in a way that ensures it’s financial stability. Between the media and the incumbent government they try and whip us up into a state of frenzy about the Budget…..perhaps so that we’ll notice them and think more of them, I’m not clear on the motive to be honest, as it seems they use the same of hype whether it is a give-away’ or a ‘tightening’ Budget!

I’m not suggesting we change the name from ‘The Budget’ to Budgety McBudget-Face’ but I am inviting us to look at it in less of a reactive ‘Oh-my-God-look-at-what-they-are-doing-to-us’ sort of way, and in more of a pragmatic and proactive manner. So this week we are going to share a bit of a budget update, and invite you to observe how significant (or otherwise) it might be to you individually, particularly if you are in the process of either building and maintaining your wealth over the long term.

The Update Bit:

The budget didn’t carry too many shockers in fairness, while it was being reported as an ‘election-friendly’ budget you’ll see from our highlight reel here that there was nothing overly generous or prohibitive in it. Here’s our ‘Super 7’ list of Budget Updates:

• Standard rate income tax band increased by €750 from 2019 onwards
• Self Employed & Directors increased by €200 to €1,350 from 2019
• Some tweaks to the lower USC bands and rates
• DIRT tax reduced to 35% – Exit Tax remains unchanged at 41%
• €5 increase to State Pensions per week, from March 2019
• Capital Acquisitions Tax (Class A) increased by €10,000
• Mortgage Interest relief against rental income increases to 100% from 2019

The Significance Of it (for those that are building and maintaining their wealth over the long term)

There is no doubt that many people in this country have a dependence on the support they receive from the State, and unfortunately this fact is likely to remain for as long as there are humans to occupy it. If you are reading this Blog or listening to this Podcast then the chances are that you may be saving a portion of your income, or you are close to, or beyond retirement. With that audience in mind I dare say that the Budget won’t impact, in any significant way at least, your long term plan. Let’s look at each of the ‘Super 7’ and see what actual impact it will have.

1. Standard Rate Income Tax: The band has increase by €750 across the board. So if you are single or widowed without dependant kids you will be able to earn, as of 2019, €35,300 per year at the 20% (Standard Rate) rate of tax. One parent families will earn €39,300, married/partners with one earner €44,300 and married/partners with two earners €44,300 + increase for second income subject to max of €26,300. Net impact for high rate tax payer is in the region of €150 per year, nice but not game-changing
2. Tax Credit For Self Employed & Directors: This ‘earned income tax credit’ first introduced in 2016 goes some way to giving the self employed something similar to the PAYE tax credit (€1,650). It will increase from €1,150 to €1,350 for 2019. Nice to get but again not a game-changer to one’s overall plan
3. Lower USC rates and bands: Someone on €100,000 income will benefit by €139 per year, someone on €50,000 will be up €89 per year, and someone on €30,000 will be up €39 per year thanks to the decrease in the rate from 4.75% to 4.5% for the higher earners, and the increase in the band at which one pays USC, from €7,360 to €7,862. Worth noting that all those over 70 years of age with USC income of less than €60,000 pay only 2% of USC
4. Dirt Tax: This Deposit Interest Retention Tax is on the slippery slope (a positive slope) and falls again, to 35% for 2019, and it is proposed that it will be 33% by 2020. This may or may not be a big-time impact for individuals, depends on how much they have on deposit and how much of an interest rate they are getting! If you have €200,000 on deposit at a Gross rate of 1%, the impact of the reduced rate will stand you a rock-solid €40 per year! Instead of paying €740 DIRT next year you’ll pay €700 per year. If you had it in an ‘investment’, where Exit Tax of 41% applies, and you were to get the same 1% interest you’d pay €820 tax. However had you been in S&P Index for past 12 months you’d be up 8.4%, meaning you’d pay €6,888 if you cashed-in today, but then again you’d take home over €9,000 in gains, but that’s not what we’re talking about today so I’ll stop now!
5. State Pension: The €5 increase will have no significant impact on one’s plan. In a recent episode we discussed the relevanc of the €12,700 limit of income which one must have in order to qualify to ‘not have to’ lock over €60,000 of their retirement funds away until they are 75. This latest increase will mean if you are already on the current max state pension that this ‘bump’ will ensure you have more than the €12,700 threshold. This is a positive for those who were forced to lodge large amounts of cash into Approved Minimum Retirement Funds with only sparse access to them, and perhaps needed to access them a little more readily. It is not all rosey however as there is apparently still the chance that the Finance Bill on Thursday could bump up the threshold to remove that access……watch this space as they say.
6. Capital Acquisitions Tax (CAT): Only one of the ‘Classes’ benefited here, and that is Class A, the group of ‘children, adopted children, step-children or certain foster children’. They can now inherit €320,000 instead of €310,000 from a parent before paying CAT Tax (33%). If you were to inherit €1m from a parent before this budget it would have led to a CAT Tax Bill of €227,000 (yes just shy of a quarter of it!), whereas post this budget the CAT Tax Bill will be €224,400 (yes, just shy of a quarter of it!).
7. Mortgage Interest Relief: Those who rent out a property, on which they have a mortgage, and receive rental income could write off some of the interest on that mortgage against the rental income. One of our most popular episodes was all about the topic, over a year ago. The Budget has increased the amount of that interest that can be written-off to 100% of the interest, it used to be 85%. If you had a mortgage of €200,000 and were paying 3% you might have paid approx. €5,800 in interest last year, you were entitled to write-off €4,930 last year against rental income, meaning you paid tax on €870 rental income up to €5,800 essentially. Following the latest change you could write-off €5,800 of it, which could mean you pay no tax on any rental income up to that level. Impact could be a net difference of €400 per year approx..

Conclusion:

Now, before anyone accuses us of looking gift-horses in the mouths or of ignoring that these changes when added up are a potentially decent annual some for sum (like what I did there!). I fully agree. What we invite people to do is to consider the fact that nothing here should influence in any significant way how one goes about building and maintaining their financial planning. Nor should it impact on your level of happiness, which the Budget seems to do every year. The ‘give-away’ Budgets won’t last forever, so we of course should make the most of them and utilise anything it frees up for our own benefit. However let’s not be so reactive as to hand over the ability or otherwise of planning our own futures to a Minister with a brief-case and some documents about a ‘Budgety McBudget-Face’ held within!

Thanks For Reading!

Paddy Delaney

QFA | RPA | APA | Qualified Coach

This week we are sharing a link to Taxback.com to their Budget Tool, so you can see what impact it might have for you. In return they will be featuring a Blog-post from me on their site (Quid Pro Quo – that’s it), so have a look if interested!