Employment taxes

Income tax and USC changes

The Bill increases the upper limit of the 2% USC band by €1,600, from €28,700 to €30,300, for the 2027 tax year onwards. The stated purpose is to prevent full-time workers on the minimum wage from moving into the higher USC band following the minimum wage increase due to take effect on 1 January 2027.

The following income tax band and credit changes will also take effect from 1 January 2027:

• The standard-rate band for a single person will increase by €2,500, from €44,000 to €46,500, with corresponding increases for married persons and individuals entitled to the single person child carer tax credit
• The personal tax credit will increase by €125 to €2,125 for a single person and by €250 to €4,250 for married persons
• The employee tax credit and earned income tax credit will each rise by €125, from €2,000 to €2,125; where both apply, the combined amount will remain capped at €2,125
• The home carer tax credit will increase by €100, from €1,950 to €2,050

The wider standard-rate band allows a greater proportion of income to be taxed at 20% before the 40% rate applies. Even so, the entry point to the higher rate remains relatively low when viewed against Ireland’s overall employment tax burden.

Employers recruiting highly skilled employees from overseas may therefore continue to face challenges when comparing Irish net pay outcomes with competing locations.

Termination payments and pension arrangements

The Bill amends the definition of "relevant capital sum" for the purposes of calculating available tax relief on receipt of an ex-gratia termination payment under the Increased Basic Exemption or Standard Capital Superannuation Benefit (SCSB) to now include any “relevant pension arrangement” as defined.

Relevant arrangements

Relevant arrangements include Personal Retirement Savings Accounts (PRSAs), Pan European Pension Products (PEPPs), MyFuture Fund under Pension Auto-Enrolment as well as foreign pension plans where the member has personally claimed tax relief under Migrant Member Relief (MMR) provision.

The stated objective of this change is to provide tax relief on termination payments on a similar basis regardless of the pension arrangements in place. 

Calculations

Under existing rules, the calculation of the Increased Basic Exemption or SCSB requires the “relevant capital sum” to be deducted from the potential exemption available unless the recipient chooses to waive their right to a future tax-free lump sum at retirement from the relevant Irish Revenue approved occupational pension scheme (which may enhance the tax relief available on the termination payment).

A formal waiver must be signed on or before the termination date. Individuals whose pension benefits were provided through other relevant pension arrangements, such as a PRSA, were not required to deduct the equivalent net present value (NPV) of their future tax-free lump sum when determining tax relief, providing a potential tax advantage for such pension arrangements as compared to occupational pension scheme members.

The Bill now requires the NPV from those arrangements to be deducted in the calculation of tax relief due – a right to waive the future tax-free pension lump sum is still permitted. The change is expected to take effect from 1 January 2027.

Moving pension arrangements with the individual

It should be noted that relevant pension arrangements such as a PRSA, PEPP and MyFuture Fund are designed to move with the individual from employment to employment.

As a result, at time of termination, these pension arrangements may include accrued pension benefits derived from another office or employment. The current proposed wording does not appear to limit the valuation of the relevant capital sum to reflect only the accrued pension benefits pertaining to the office or employment which is ending.

This compares unfavourably to those in Irish approved occupational pension schemes, where the relevant capital sum is linked primarily to the pension benefits arising while a member of that scheme – the primary exception being where an employee has taken up a new employment and chooses to aggregate prior accrued pension benefits within the new employer’s occupational pension scheme.

Update to employer processes required

As the calculation of the relevant exemption determines the appropriate taxable amount for payroll purposes, employers will need to ensure processes and procedures are updated to avoid payroll compliance issues which can lead to interest and penalties for the employer.

The extension to other relevant pension arrangements will require employers to fully engage with employees, and where applicable the pension provider, to ensure that the calculation is accurate.

As foreign pension plans are also included (to the extent MMR relief has been personally claimed), this may involve engagement with the actuaries of an overseas arrangement that may not be familiar with the Irish NPV requirements.