The Tánaiste has said that the Budget will include a substantial income tax reduction package.

Leo Varadkar said that the 30% tax rate for middle income workers is under consideration, but he warned that no measures have been decided on yet.

The Department of Finance today published its Tax Strategy Group papers which set out options ahead of next month's Budget.

One area under close scrutiny is income tax bands and the possibility of a third tax rate to benefit middle-income earners.

The Government has set aside just over €1 billion for tax relief in the upcoming Budget.

How that will be used will be watched closely as people's incomes come under pressure from inflation and the Government is reminded of its promise in the Programme for Government to index tax bands to wage increases to prevent workers from paying more in tax.

The Tax Strategy Group (TSG) paper on Income Tax examines the options and costs of widening tax bands to keep pace with wage increases as well as the idea of a new 30%, tax rate to benefit middle income earners.

The Minister for Finance said that a 30% tax rate would represent a "significant structural change".

He warned it would be difficult to speed-up the introduction of any tax changes announced in the budget.

Paschal Donohue said that making changes in relation to taxation "any earlier than we normally do" would be difficult due to the amount of payroll systems that would have to be updated across the country.

Asked if changes to the taxation system could take effect this year, Mr Donohue said that he intended to stick to normal timings with regards to the Finance Bill, when gives effect to measures announced in the budget.

His comments indicate that any changes would likely take effect in 2023.

Paschal Donohoe, speaking at a press conference, cautioned that the TSG papers have a range of options but that no decisions would be revealed until Budget 2023.

He said that the €6.7 billion in cost-living-measures to be introduced in the budget strikes the right balance between helping households and ensuring that Government does not worsen the inflation situation.

The minister said the economy was in a strong position, with continued growth predicted over the coming months.

Asked about concerns around a recession in the UK, Paschal Donohoe said that the outlook for Ireland remained positive.

While growth forecasts have been downgraded recently, he said that the Irish economy is still expected to grow over the coming months.

He warned that parts of the world faced the risk of a "significant reduction in growth" with some country's ultimately facing a recession. However, he said that Ireland's situation was more positive.

"I do not at the moment see any change in our performance at the moment that is a cause for concern," he told reporters.

The minister that Ireland's economy has seen a strong recovery since Covid-19 public health measures were lifted.

Unemployment now stands at 4.2%.

Asked if the €5 billion surplus in exchequer returns announced last week could be used to boost the spending package in Budget 2023, Mr Donohoe pointed out that approximately €3 billion of that surplus was made up of corporate tax receipts which he expected would fall over the coming years due to the agreement on a minimum effective tax rate.

He said that while Government hasn't decided on how it will spend the surplus exchequer returns, he believed the coalition would have to be mindful that much of that surplus was regarded "one-off income".

Paschal Donohoe at press conference to discuss Tax Strategy Papers (pics:

The TSG paper notes that with the recovery in the economy this year, income taxes are projected to increase by €2.8 billion, or 10.6% this year, on top of a 17.6% increase last year.

It refers to the Programme for Government which says that from Budget 2022 onwards, "in the event that incomes are again rising as the economy recovers, credits and bands will be indexed linked to earnings".

The Central Bank has forecast that wages across the economy, on average, could go up by 6.6% next year in response to lower levels of unemployment and wage bargaining in the face of inflation.

The Summer Economic Statement allocated just over €1 billion for tax relief measures in the upcoming Budget.

The TSG estimates that increasing the standard rate band by €1,500 and increasing credits by €50, similar to the change in last year's Budget, would give an average single worker an extra €8 per week and would cost just over €0.5 billion in a full year.

Expanding the band by €3,000 and increasing credits by €100 would give a benefit of €15 per week and would cost €1.145 billion in a full year. This would benefit 66% of taxpayers.

It also examines two options around the idea of a new 30% tax rate for middle income earners.

One option would see taxpayers pay a rate of 30% at the point where they now enter the top 40% rate at €36,800 up to €41,800.

This would cost €525m in a full year and would benefit a single taxpayer by approximately €10 a week. It would benefit 35% of taxpayers.

Another option would be to expand the new 30% rate up to incomes of €46,800. This would cost €945m a year and benefit a single taxpayer by approximately €19 a week.

The TSG paper highlights how the proposal would address the fact that the entry point to the higher rate in Ireland is "low by international standards". It is also "easily understood" and would enhance the competitiveness of Ireland's income tax system.

It also points out, however, that other measures would be needed for low and modest income earners and that it would be a big change for Revenue's collection systems.

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Additional reporting: Tommy Meskell