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Income tax cuts could be wiped out by reductions in mortgage interest relief 

Changes to income tax bands and Universal Social Charge (USC) rates will leave a little extra in worker’s wages after Budget 2018.

However, changes elsewhere, particularly to Mortgage Interest Relief, may mean the so-called “squeezed middle” do not end up with anything extra at the end of the month.

Minister for Finance Paschal Donohoe announced an increase of €750 in the income tax standard rate band for all earners, from €33,800 to €34,550 for single individuals and from €42,800 to €43,550 for married one-earner couples. That works out at an additional €150 per year or €12.50 per month.

From January, there will also be changes to USC. People earning up to €13,0000 are exempt but anyone earning more than that will pay 0.5% on the first €12,012 of their income. Above that, the rate drops from the current 2.5% to 2% and the threshold for the higher rate is raised to €19,372. 

Minister Donohoe pointed out that this would ensure people working full-time on the minimum wage would not be subject to the higher rate of USC. A worker earning €18,000 will be less than €50 per annum better off as a result of the change.

The higher rate of USC is being reduced to 4.75%, down from 5% in 2017. The 4.75% rate will apply for income earned from €19,372 up to €70,044. Any income earned over that limit will continue to pay 8% USC.

Someone earning €35,000 will see their USC contribution fall by less than €100 per annum. The Government calculates that a single person on €35,000 will have a net increase of €241 to their take-home pay. 

There is also an increase in the Home Carer Tax Credit, from €1,100 to €1,200 and changes to Family Income Supplement. The Government calculates that a married couple with two children and one income of €45,000 will have a net increase of €366 in 2018.

However, many of those benefiting from these income tax changes are also those who will be impacted by the changes to Mortgage Interest Relief.

More than 292,000 mortgage accounts, involving over 420,000 mortgage holders, are benefitting from the relief. The average benefit is over €600 per qualifying account and, for those who bought between 2004 and 2008, the benefit may be much higher in some cases.

The relief was due to end completely at the end of December this year but instead, Minister Donohue confirmed it would be phased out over the next three years.

Fianna Fáil Finance Spokesperson Michael McGrath is describing this as a win for his party.

“In the last election, Fianna Fáil was the only party that campaigned to retain mortgage interest relief to 2020,” he said. “We secured agreement last year that it would be retained to 2020 and phased out over the next three years as opposed to ending overnight."

“In simple terms, mortgage holders who benefit from the tax relief at source will in 2018 keep 75% of the benefit they had in 2017; they will keep 50% in 2019 and 25% in 2020."

“With almost 74,000 family home mortgages in arrears, I would like to particularly welcome confirmation today of the extension of mortgage interest relief for existing recipients for a further three years – albeit on a reduced basis.” 

While it is certainly better than it ending completely, for impacted mortgage-holders the bottom line is their repayments will increase from January 2018. 

Anyone who benefited from rate cuts in recent months will see them creep back up as the relief drops, with the amount depending on the size of their interest payments. 

So an increase coming into your account from your employer but a little more going out on your mortgage payment.