Dáil Éireann díospóireacht -
Wednesday, 3 Mar 1999

Vol. 501 No. 4

Written Answers. - Tax and Social Welfare Codes.

Jan O'Sullivan

Ceist:

84 Ms O'Sullivan asked the Minister for Finance the plans, if any, he has to implement proposals on the integration of the tax and social welfare systems; the way in which he plans to address inequality of treatment and of opportunity for dependent spouses; and if he will make a statement on the matter. [6312/99]

Minister for Finance (Mr. McCreevy)

The report of the expert group on integrating the tax and social welfare systems, commonly referred to as the TWIG report, was published in 1996. The group's terms of reference covered policy on both taxation and social welfare. The recommendations relating to social welfare measures are primarily a matter for my colleague, the Minister for Social, Community and Family Affairs. The report contained three principal recommendations in relation to tax policy: (1) the gradual elimination of the general income tax exemption limits thereby eliminating marginal relief; (2) the gradual phasing out of the employment and training and health levies over time as resources permit, started by converting the threshold into an allowance; and (3) improved co-ordination of tax and social welfare reforms.

The exemption limit and marginal relief system was identified by the group as a contributory factor in unemployment and poverty traps. Following the changes I announced in the budget of 1999, the first of these recommendations has been largely achieved. The basic personal allowances for the forthcoming tax year, of £4,200 for a single person and £8,400 for a married couple, exceed the general exemption limits of £4,100 for a single person and £8,200 for a married couple. The general exemption limits will now apply only to a small number of married couples on low incomes with three or more children. The numbers on marginal relief have fallen from over 16 per cent of the taxpaying population to just over 2 per cent arising from measures introduced in the last three budgets. Most of the remaining marginal relief cases represent taxpayers aged 65 and over who have a considerably higher exemption limit and where the considerations applied by the TWIG to the general exemption limits would have very limited relevance.

The second recommendation, concerning the levies has been addressed by increasing the threshold for the payment of the levies. However, phasing out of the levies would be costly, and it would not benefit anyone with earnings below the threshold, currently £10,750 per year, though it would be of considerable benefit to those above this threshold. In the 1999 budget, I increased the threshold for payment of the levies to £11,250. I also restructured the levies by abolishing the employment and training levy of 1 per cent and increasing the health levy to 2 per cent, resulting in a reduction of 0.25 per cent in the combined levy charge. The recommendation concerning the levies will be borne in mind in the context of the preparation of future budgets.

On the third recommendation, the analysis undertaken by the expert group pointed to the benefits which could be obtained from a more co-ordinated approach to reforms of the tax and social welfare systems, and the need to study this interaction has been taken on board in the formulation of tax and social welfare packages in recent budgets.

The contents of the TWIG report will continue to be taken into account in the formulation of proposals for further changes in the income tax system.

With regard to the treatment of spouses, there is no inequality of treatment for spouses within the Irish income tax code. Married couples have the option of joint assessment, separate assessment or of being assessed as two single people. Under joint assessment, either spouse can be nominated as the assessable person. Where they avail of the option for assessment on their joint income, they are entitled to double the allowances, rate bands and so on available to a single person. The combined allowances are allocated between the spouses on the basis of their instructions to the tax office. In a case where only one of the spouses is in paid employment, this facility for joint assessment is of significant benefit as the couple can instruct the tax office to allocate the total tax allowances to the employed spouse.

Where joint assessment applies, a married couple may opt for separate assessment under which the couple are taxed as if they were not married but the total allowances due to them as a married couple are divided between them. However, any unused portion of the bands or allowances which one partner has can be assigned to the other spouse, normally at the end of the tax year. The total combined tax paid under separate assessment for a married couple will be the same as that which would be paid by them under joint assessment. An election for separate assessment may be made by either spouse, that is, joint election is not required.

Where a couple elect for single treatment each spouse is treated as a single person with no right of transfer of allowances or reliefs between them. This treatment can result in the couple paying more tax than they would under joint assessment or separate assessment. Again, either spouse may elect for single treatment.

In some cases, married women who work are taxed at a high rate on low earnings. This is because, in these cases, most of the couple's income tax personal allowances are being used by their husbands. In this case, the wife avails of only the PAYE allowance, which was standard rated and increased to £1,000 in this year's budget, and the increase in the married allowances is allocated to her husband. However, it is open to the couples concerned to contact their tax inspectors to have a greater portion of their allowances allocated to the wife, thereby more evenly spreading the tax burden between the couple.