# Should we replace annual allowances with cumulative allowances?



## Brendan Burgess (12 Jan 2022)

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 


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


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## Brendan Burgess (12 Jan 2022)

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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## NoRegretsCoyote (12 Jan 2022)

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

You would also get otherwise wealthy people using it as a tax shield for unearned income.


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## Brendan Burgess (12 Jan 2022)

NoRegretsCoyote said:


> 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


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## odyssey06 (12 Jan 2022)

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?


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## Purple (12 Jan 2022)

odyssey06 said:


> 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.


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## Brendan Burgess (12 Jan 2022)

Purple said:


> 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.


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## NoRegretsCoyote (12 Jan 2022)

odyssey06 said:


> 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.


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## Brendan Burgess (12 Jan 2022)

Brendan Burgess said:


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





NoRegretsCoyote said:


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



Hi Coyote

With an absolute contribution limit, there would be no need to collect the earnings information.

Brendan


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## Towger (12 Jan 2022)

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...


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## Brendan Burgess (12 Jan 2022)

Towger said:


> Then you have Directors Pension...



That is a very good point. 

Company owners don't face the annual limits to the same extent. 

Brendan


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## ClubMan (12 Jan 2022)

Towger said:


> 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?


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## NoRegretsCoyote (13 Jan 2022)

Towger said:


> 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!


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## Brendan Burgess (14 Jan 2022)

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


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## Sophrosyne (14 Jan 2022)

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.


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## Zenith63 (14 Jan 2022)

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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## Brendan Burgess (14 Jan 2022)

Zenith63 said:


> n executive pension a company can contribute €750k once-off,



I keep forgetting that. I will add it to my submission.
Thanks


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## ClubMan (14 Jan 2022)

Seems like people are just plucking figures out of thin air here lately?


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## Sophrosyne (15 Jan 2022)

Brendan Burgess said:


> 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?


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## Brendan Burgess (15 Jan 2022)

Sophrosyne said:


> 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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## Sophrosyne (15 Jan 2022)

You are confusing a threshold with a tax relief.

A person who starts working at 18, would have to accept a lower personal tax credit to facilitate people who may not start working until they are 25.


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## Brendan Burgess (15 Jan 2022)

No. Everyone would have the same, but reduced, personal tax credit of say €1,500 per year. 

Let me put it another way. 

If you lose your job and earn nothing in 2022, do you think you should pay the same tax in 2023 as someone who had an income in 2022?

Brendan


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## Sophrosyne (15 Jan 2022)

Yes I would, provided I had the same income in 2023.

Irrespective of the amount of the credit, you propose to apply it to people who, currently, have no entitlement to that credit.

When you say it would be cost neutral, how are you estimating the cost?


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## Brendan Burgess (15 Jan 2022)

Sophrosyne said:


> When you say it would be cost neutral, how are you estimating the cost?



I am not. I am setting out the principle. 
If the idea is accepted by the government, the Dept. of Finance would have to make the adjustments to make it revenue neutral for the Exchequer.


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## Brendan Burgess (15 Jan 2022)

Hi Sop

OK, let's take another approach. 

In 2022, I work all year and earn €50,000. 
In 2022, you work from January to June and earn €50,000 for those six months and you are unemployed for the rest of the year.

Should we pay the same amount of tax in 2022 or should I pay more or less than you? 

Brendan


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## Bluefin (15 Jan 2022)

Brendan Burgess said:


> I am writing my submission  on this.
> 
> Are there any other annual allowance which could be extended to a cumulative basis?
> 
> ...


Hi Brendan, 

Tbis is a great idea from a taxpayer perspective but I don't see have you can configure this to be tax neutral.. 

Take the small gift examption of 3k..imagine this gift accumulated for 30 years for your child and you could give them a gift tax free of 180k at age 30 for a house deposit. Now as we all know the first 20 years of a child's life is potentially the most expensive for parents.. Mortgage payments, childcare costs etc, earnings hopefully on an upward trend but money would be very tight and they may not be in a position to give their child 6k per annum for those years. A parent could leave a lifetime inheritance at this stage and legally avoid inheritance tax.


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## Sophrosyne (15 Jan 2022)

Brendan Burgess said:


> Hi Sop
> 
> OK, let's take another approach.
> 
> ...



That’s not the same thing.

Tax credits are applied to income earned in a year of assessment.

What you propose is to apply tax credits in a year for which there is _no_ taxable income.

Let’s say you wanted to project how much the Single Personal Tax Credit would cost for 2023.

You would draw on several sources, including Revenue to estimate the number of recipients.

In your scenario, the credit is not a fixed amount, but depends on:


whether or not the recipients have a taxable income for the first time in 2023,
their date of birth
Capturing the number of years from 18 years to 2023
the amount of the tax credit for each year from the time they were 18 years to 2023, (when they first acquired a taxable income).
In deciding the amount of the Single Personal Tax Credit *each year*, cost neutrality would have to form part of the equation.

If you think the Finance Department is going to work that out for you; good luck with that.


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## Brendan Burgess (15 Jan 2022)

Sophrosyne said:


> That’s not the same thing.



Hi Sop

Whether it's the same thing or not, would you answer my question? 

Brendan


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