You’re a landlord who snapped up five properties in Dublin in late 2011 – when the recession of the time had pushed property prices to their lowest in years. You’ve been making €90,000 in rental income a year from those properties since 2012. However, since the pandemic hit last March, a number of your tenants lost their jobs and they have been unable to afford their rent as a result.
Some of these have moved back home with family and you haven’t been able to get new tenants in since.
You took a big hit to your rental income in 2020 as a result and as you expect these difficulties to continue into 2021, you believe your rental income will be only €60,000 in 2021. You have no other income. You’re married, but you have no children and your spouse doesn’t work.
You’ll be about €235 a week worse off next year than you were in 2012 – due to the slump in rental income you’re expecting in 2021. On the plus side, however, you’ll be losing much less of your income to tax in 2021 than you did in 2012.
You’ll take home €43,757 of your €60,000 rental income next year after paying tax, according to Alison McHugh, director of private clients with Deloitte. In 2012, when you made €90,000 in rental income, you took home €55,959 after paying tax, according to McHugh.
This means you lost almost two-fifths of your income to tax in 2012 – however, next year, you’ll only lose about a quarter of your income to tax.
Should you not be hit by the pandemic next year as badly as you expect to be – and you earn €90,000 in rent in 2021, your take-home pay will be €58,509 in 2021 – up from €55,959 in 2012, according to McHugh.
So you’ll take home about €2,550 more of that money after tax than you did on the €90,000 earned in 2012 – making you better off to the tune of €49 a week in 2021.
This is largely due to the increase in the standard rate tax band (the portion of income taxed at the 20pc rather than the 40pc rate of income tax) and cuts in and changes to the Universal Social Charge (USC) in recent years, according to McHugh.
Another tax advantage which you have as a landlord is that if you have any mortgages, you can now write off the full amount of mortgage interest paid against your rental income when calculating the amount of tax you owe.
This is different to 2012 when you could only write off three-quarters of your mortgage interest.
UNEMPLOYED TRAVEL AGENT
You’re a travel agent who was laid off in late 2020 as a result of the Covid-19 crisis forcing your employer to shut down.
You have been on the Pandemic Unemployment Payment (PUP) since. Should you be unable to find work in 2021, your only source of income will be the PUP and the dole (if and when the dole replaces the PUP). You’re single and you have no children.
Your total income for 2021 will come to €11,620 if you are completely reliant on the PUP and dole next year, according to KPMG. This assumes the PUP is cut to €250 in February and replaced by the dole of €203 a week from April 2021 – as planned.
Social Protection Minister Heather Humphreys has said she will review the planned PUP cuts in January.
You won’t have to pay tax on this €11,620, but this level of income could easily be a third of what you had previously earned while working so it will be a big shock to your pocket.
Should you manage to secure employment and earn €30,000 in 2021, you’ll take home about €500 more after paying tax than you would have had you earned €30,000 in 2012, according to KPMG. Your take-home pay on a €30,000 salary would be €25,447 next year -compared to €24,945 in 2012. So you would be about €10 a week better off after tax in 2021 than in 2012.
“This is purely due to USC and PRSI-related adjustments since 2012,” said Eoghan Quigley, tax partner with KPMG.
“The Irish tax regime is not harsh on individuals at this level of income [salary of €30,000], but this case really does illustrate the importance of keeping people in work. At a salary of €30,000 the individual is contributing €4,503 [between income tax, the USC and PRSI] to the State – but the loss of their job inverts that to a cost to the State of €11,620.”
You’re a 40-year-old musician who had to cancel all of his gigs for the year when the pandemic hit in March. Your only income since then has been the PUP. You’re pessimistic about any gigs going ahead next year either so you recently started teaching music online and you’re hoping to earn €30,000 from that in 2021. The last time you earned €30,000 was 2012. You are single and you have no children.
Under Budget 2021, you’ll take home €26,800 after tax next year if you earn €30,000 – assuming you don’t qualify for the artist’s tax exemption on any of your earnings, according to McHugh.
Back in 2012, you would have only taken home €23,031 after tax on earnings of €30,000. So you’re about €72 a week better off under Budget 2021 than you were under Budget 2012.
One of the main reasons for this is the self-employed tax credit (known as the earned income tax credit). This credit did not exist in 2012.
However, since its introduction in 2016, the earned income tax credit has been steadily increased.
“Budget 2021’s €150 increase in the self-employed tax credit to bring it in line with the PAYE tax credit [which employees can claim] will benefit this musician,” said McHugh.
The earned income tax credit will be worth €1,650 in 2021 – so with this credit alone, you will be able to earn €1,650 next year before paying tax. Be aware that the PUP payments received in 2020 could trigger a tax bill for you – and if so, this tax bill will need to be repaid over the coming years.
Let us say you’re a self-employed plumber who earned €49,000 consistently in recent years – including in 2012. You’ve just lost a major contact and so you expect to earn €35,000 in 2021.
Despite the €14,000 loss of income, you’ll only take home €3,717 less pay after tax next year on earnings of €35,000 than you would have on income of €49,000 in 2012, according to EY. Your take-home pay on earnings of €35,000 will be €29,022 next year; your take-home pay on earnings of €49,000 would have been €32,739 in 2012, EY found.
So even though you will be about €71 a week worse off in 2021 than you were in 2012, the cuts in income tax and USC in recent years will somewhat insulate you from the hit to your income in 2021.
You’ll lose just under a fifth of your €35,000 earnings to tax next year but in 2012, you would have lost about a third of your €49,000 earnings to tax.