Pensioners Who Are Liable for Extra Income Tax Could Find They Now Owe Dirt Too

The Mail on Sunday (London, England), January 29, 2012 | Go to article overview

Pensioners Who Are Liable for Extra Income Tax Could Find They Now Owe Dirt Too


Byline: Colm Rapple

my view Pensioners who recently discovered they were liable for income tax because of their social welfare pension could be in for another shock.

Those who weren't previously liable for income tax were also exempt from Dirt, the deposit interest tax. Anyone over 65 and not liable for income tax can get their interest paid without any tax deduction.

Alternatively, they can reclaim any tax that has already been deducted. But that exemption from Dirt no longer applies once the pensioner becomes liable for income tax. The Revenue Commissioners say the numbers affected are likely to be small because they say the application form for Dirt exemption is very specific about qualifying income limits. But the impact will be significant for some and will be particularly painful for those whose income puts them just marginally into the tax net and who built up some savings for their retirement.

They'll be paying income tax at 40% on the income above the exemption limit and Dirt at 30% on their deposit interest. The exemption limits create their own anomalies but they do reduce the income tax bills of most pensioners. The majority of those with incomes above the limits benefit from the marginal relief that dictates that income in excess of the limit is taxed at no more than 40%. But levying a flat 30% tax rate on deposit interest, with limited exemptions, is inequitable.

It doesn't make economic sense, either.

It's paid by many under-65s whose incomes are so low that they are not liable for income tax. It can be levied on losses - when interest rates are insufficient to maintain the purchasing power of savings in the face of rising prices. And it's doubtful if it encourages people to spend more.

In the US, Republican presidential hopeful Newt Gingrich would like to remove all taxes on interest earnings. That's obviously an election promise and it makes little economic sense. It's not an option here, but there is certainly scope for reforming the way we tax deposit interest.

The only individuals exempt from Dirt are those over 65 or permanently incapacitated who are not liable for income tax because their incomes are too low. But many others on low incomes have to pay the tax. Those two exemptions apart, it's payable irrespective of income at the flat rate of 30%.

The liability extends equally to the unemployed, who may be holding on to savings for fear of even worse days ahead, and to highearning individuals liable for tax at 41% on the top slice of their incomes. …

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