Should we replace annual allowances with cumulative allowances?

Brendan Burgess

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Another one for my submission to the Commission on Tax and Social Welfare.

Why do we have annual allowances. Let's use pensions as an example

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Why do you have to use it or lose it?

Why not carry forward any unused allowance?

In my 20s and 30s I should be saving the deposit and clearing down my mortgage. But I am forced by the system to divert money into a pension scheme or else I won't be able to maximise my contributions.

Why not just make it €10,000 a year cumulative - irrespective of income.

If I reach the age of 30 without having contributed, then I can get tax relief on €100,000 contributions that year.

Brendan
 

Brendan Burgess

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Other examples:

The €3,000 small gift exemption for CAT. Make it €3,000 cumulative.

The €1,270 CGT exemption. Make it cumulative.

The Personal Tax Credit could be cumulative from the age of 18.
If I don't start earning until the age of 25, I would have tax credits of €11,550 .
If I am in continuous work but am unemployed for two years, in the third year, I would have three years of tax credits.

Of course, if this were introduced the Personal Tax Credit would need to be reduced to keep the save level of tax receipts for the Exchequer.

Brendan
 
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Brendan Burgess

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Because you want to encourage people to take advantage of (compounding) equity returns over long periods.

If someone has insufficient income early in their career to contribute to a pension they won't be compounding anything! As their income increases later, they should be able to avail of that missed opportunity.

If they are paying down their mortgage, they will be compounding the interest saved.

So that is not a reason for it.

Brendan
 

odyssey06

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It's an interesting idea although how would you account for say a high earning executive who move here from another EU country? Do you pro-rate their allowance for number of years resident?
 

Purple

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It's an interesting idea although how would you account for say a high earning executive who move here from another EU country? Do you pro-rate their allowance for number of years resident?
I presume you'd start counting from the time someone became tax resident in this country.
 

Brendan Burgess

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I presume you'd start counting from the time someone became tax resident in this country.

That is better than my "since the age of 18 proposal"

You get an annual allowance for every year you are tax resident.

So if you are an Irish resident but emigrate for 10 years before coming back, you don't get allowances for those ten years.
 

NoRegretsCoyote

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It's an interesting idea although how would you account for say a high earning executive who move here from another EU country? Do you pro-rate their allowance for number of years resident?
As I understand it pension contributions can only be made from earnings.

With a move to a cumulative approach it could be difficult from a practical perspective to verify what your earnings were 20 years ago.
 

Towger

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The Pension Contribution Age Limits are not set in stone, Revenue will give exemptions if your income when you are younger is lightly to be more than when you are older. e.g. Professional sports person. Then you have Directors Pension...
 

ClubMan

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The Pension Contribution Age Limits are not set in stone, Revenue will give exemptions if your income when you are younger is lightly to be more than when you are older. e.g. Professional sports person. Then you have Directors Pension...
Should that be "i.e. professional sports person" rather than "e.g." or are there other people who can avail of such flexibility?
 

NoRegretsCoyote

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The Pension Contribution Age Limits are not set in stone, Revenue will give exemptions if your income when you are younger is lightly to be more than when you are older. e.g. Professional sports person.
That's a very specific scheme.

I can't apply for a refund of the tax I paid when I was 29 and I suspect you can't either!
 

Brendan Burgess

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I am writing my submission on this.

Are there any other annual allowance which could be extended to a cumulative basis?

My current list is
  • pension contributions
  • income tax credits
  • Small Gifts Exemption for CAT
  • Annual exemption from CGT
 

Sophrosyne

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Refunds for previous years are made from current exchequer funds.

I think one of the reasons that review years were, in most circumstances, reduced for from 10 years to 4 was to provide greater exchequer funds certainty.
 

Zenith63

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Certainly agree on pensions. It’s absolutely bizarre that for my age/past service using an executive pension a company can contribute €750k once-off, but somebody who just started earning enough to begin a pension as an employee can only contribute €23k.
 
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Sophrosyne

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The Personal Tax Credit could be cumulative from the age of 18.
If I don't start earning until the age of 25, I would have tax credits of €11,550 .
If I am in continuous work but am unemployed for two years, in the third year, I would have three years of tax credits.

Of course, if this were introduced the Personal Tax Credit would need to be reduced to keep the save level of tax receipts for the Exchequer.
I’m sorry @Brendan Burgess , this makes no economic sense.

Tax reliefs are not a bottomless pit. If you divert them to X, you must recover them from Y

A principle of income tax is that there must be an income (not a potential income) against which to offset reliefs,

You suggest providing tax credits for at least 7 years to an individual who has no taxable income.

How would that affect budget estimates each year?

What would justify diverting tax reliefs in this way?

In addition, how would a scenario such as this be administered?
 

Brendan Burgess

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Tax reliefs are not a bottomless pit. If you divert them to X, you must recover them from Y

Fully agree.

All my proposals are tax neutral for the Exchequer - they are designed to be fairer to tax payers and not to increase or decrease the level of taxation.

So if the cumulative approach is taken, the actual allowance would need to be reduced.

A sort of cumulative approach works in other areas e.g. the CAT thresholds.

It's €335k in total. I don't get a use it or lose allowance of €5,000 a year. ( Well I do with the small gifts exemption.)

Brendan
 
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