How do you “make work pay”, as the Government has indicated it intends to do come budget day on October 6th? Income tax cuts are likely, as are targeted welfare hikes and possible changes to inheritance tax.
It’s unlikely, however, that any of the measures in the “modest” budget, as described by Minister for Public Expenditure Jack Chambers, will see workers’ incomes increase by anything more than a couple of hundred euro a year come next January.
The Government has said that about €1.5 billion has been earmarked for a tax package. It sounds a lot but it really doesn’t leave much room for tax cuts.
“I suspect they’ll stay around the €1.5 billion figure,” says Olive O’Donoghue, head of employment tax with KPMG, noting that the tax package has remained relatively consistent in recent years (ie at €1.5 billion for 2026 and €1.4 billion for 2025). “They’re probably not going to vary too much away from that.”
Amy Crowther, a director with PwC Private, doesn’t expect any leftfield surprises on the day. “The main surprise will be the scale of how far they go on income tax, and how generous investment accounts are etc.”
Of course, the tax package could be bigger if Minister for Finance Simon Harris delivers some revenue-raising measures.
“There will have to be some revenue generation,” says O’Donoghue, adding that this could be on the excise side. Dropping existing measures, such as mortgage interest relief, which applies at a reduced rate this year and may come to an end in December, could be another option.
More money in your pocket?
We know there are changes coming on the income tax front. But this doesn’t mean households will enjoy a real increase in their standard of living. It is, in effect, more of an inflation-linked adjustment.
Workers are suffering from so-called “fiscal drag” or “bracket creep”, where they don’t enjoy the full benefit of a pay increase as it pushes them into higher tax brackets. Last year, the band for the standard rate stayed at €44,000, with no inflation-linked adjustment.
As Crowther explains: “My salary is increasing but the bands aren’t moving, so I’m paying more tax and I don’t really have an increase in my disposable income.”
But changes in this area are expensive. Costings show that inflation-proofing the income tax bands – by, say, a 4 per cent increase – would cost about €1 billion. “That would eat into the €1.5 billion very quickly,” says Crowther.
Any change then is likely to have only a moderate impact. O’Donoghue suggests that the standard rate band might increase by €2,000 to €46,000, for example. That would mean workers earning this amount or more will save €400 a year in tax.
But it’s not really a tax cut given the impact of inflation in recent years, more of a tax adjustment.
“You’re preserving the purchasing power of net pay as best as you can but, in real terms, people aren’t walking away with more money in their pockets,” says O’Donoghue. She would like to see the automatic indexation of bands and credits so that workers are protected from inflation going forward.
As expanding the standard rate income tax band is of most benefit to those earning around this income level, as Crowther notes, the Government will also likely look at broadening USC bands to target lower-income payers. This generally aims to ensure that those on the minimum wage do not see any increase in the rate of pay eaten up by tax. The national minimum wage is due to rise to €14.94 in January 2027 from €12.71 currently.
An increase in credits, such as the PAYE and earned income credit, is also likely, and would help all workers.
But remember, not all taxes will go down; from October 1st, employee PRSI will increase by 0.15 of a percentage point, up to a new rate of 4.35 per cent.
This means that the top marginal tax rate will go up again, from 52.2 per cent to 52.35 per cent, and, for those who are self-employed, from 55.2 per cent to 55.35 per cent.
“For high earners, they’re not necessarily making work ‘work’ for them,” says Crowther.
Get investing
It’s been talked about a lot, but we have yet to hear the crucial details of the new investment accounts, which will determine how good the scheme is actually going to be.
“The devil will be in the detail,” says O’Donoghue.
The rate at which tax will apply will be important, as will the tax-free threshold. Sweden, for example, has a threshold of about €26,000 and a rate of 1.065 per cent above this. If the threshold is too low, and/or the rate too high, the scheme may not be attractive.
Issues such as whether or not you can transfer the account tax-free to a spouse, and what happens if you die also need to be addressed.
“It has the potential to be beneficial but it will all be based on the numbers,” says O’Donoghue.
Crowther agrees. “It’s a good vehicle to get the average person investing longer term and moving towards greater financial resilience.”
But there is also disappointment that “a more fundamental reform of the existing [investment exit tax] regime is being pushed out to budget 2028 and beyond”, says Crowther.
This means that deemed disposal, whereby tax – currently 38 per cent on all profits – has to be settled every eight years, looks likely to remain for the moment. That’s a steep charge and, for many, a disincentive.
Inheritance tax
Last year, the parent-to-child threshold stayed at €400,000 (the last increase was in 2024) but with average house prices, particularly in Dublin, now in excess of this, there is an expectation that the threshold might rise once more. It was once as high as €542,000, before being slashed during the financial crisis.
“It never kept pace with inflation,” says O’Donoghue.
Crowther suggests that there could be an increase, albeit not a huge one, noting that a move from €400,000 to €500,000 would cost the exchequer about €86.6 million.
“There could be some room in the budget for incremental increases, but it’s unlikely to be anything substantial, I think.”
There have also been growing calls to do something for single people. At present, just €40,000 can be gifted tax-free to close relatives other than children. This means that, as O’Donoghue notes, a child inheriting €500,000 from a parent, with an intact tax-free threshold, will pay tax of just €33,000. But someone inheriting the same amount from an aunt or an uncle will pay tax of €158,100.
“It’s starkly different,” she says.
However, while change might be coming, it’s unlikely to happen this year, given the cost.
“The costing around that seems to be quite significant, so I don’t think they’ll have the scope in this budget to do anything,” says Crowther of the group B threshold.
O’Donoghue also argues that “the rate itself is problematic”. She would like to see the 33 per cent rate for both capital acquisitions tax (on inheritances or gifts) and capital gains tax fall to 20 per cent.
And what about the €3,000 small gift exemption? Given that it has been at that level since 2003, is it time for an increase? We will wait and see.
Money for a home
Many tenants now rely on the rent tax credit, which offers savings of up to €1,000 a year per person on rent payments, to help manage their housing costs. In 2024, more than 335,000 taxpayers benefited from it, at a cost of €363 million.
“I do think we might see an increase in that credit. It does give immediate cash flow to renters who are facing affordability pressures at the moment,” says Crowther.
O’Donoghue would also like to see it made permanent; it is currently due to finish at the end of 2028.
The Help to Buy scheme is due to run until 2029 but might the benefit be expanded? The maximum amount allowed back on the purchase of a new home is €30,000, while the threshold for the value of a qualifying property currently stands at a sale price or market value of €500,000.
Crowther is not sure if an increase may be on the cards, as it may not “exactly help with affordability”, suggesting instead that an extension to second-hand homes might be more helpful.
Cost of living
Experts agree that we’re unlikely to see a return to the days of blanket reliefs, such as the electricity credit, with any reliefs on offer likely to be targeted to those most in need.
O’Donoghue says the Government will more likely look to offer relief through “permanent and targeted measures, rather than return to one-off payments”.
“I don’t think we can expect any more blanket changes,” she says.
Crowther agrees.
“There will be a bigger shift towards more permanent measures,” she says, by increasing the amount of people’s take-home pay through the tax system and supporting those most in need through the welfare system.
There is likely to be some relief for parents on childcare costs, with Minister for Children Norma Foley looking to a “breakthrough budget” on cutting costs.