We’re taking a different approach to reporting on this year’s Budget. Where we have previously focused on reporting on how the budget affects your take home pay, specifically tax band, tax credits and USC measures, this year we are adding the additional element of how inflation/Cost of living increases impacts your standard of living.
Why are we taking this approach? It is a confluence of two factors. Firstly the high level of inflation. How inflation affects Individual cost of living is measured using the Consumer Price Index and currently this is running at a very significant annualised rate of 6.3%. Secondly, it is stated government policy to “Index tax bands and tax credits” to inflation.
If you are a customer coming to this page, you will have received a personal review showing how the Budget has affected you. This review reflects the income tax changes and how they mitigate the cost of living increases based on your actual pay last year. For the cost of living increase we have used the Central Bank’s forecasted rate of inflation for 2024 which is 3.2%.
If you are not a client, we hope the following two examples will help you understand this inflation in action and how these are mitigated by the tax changes in Budget 2024.
Jimmy takes home after tax €25,000 a year.
To maintain his standard of living, when inflation is at 3.2%, he would need an additional €800.
The tax measures in the budget that impact Jimmy are the €100 increase in the personal tax credit, the €100 increase in the employee tax credit and the €250 increase in the rent tax credit, presuming he’s renting. The changes to USC will save him €83. Combined these give a reduction in his tax bill of €533
This means that Jimmy will have a shortfall of €267 next year.
Mary takes home after tax €50,000 a year.
To maintain her standard of living, when inflation is at 3.2%, she would need an additional €1,600.
The tax measures in the budget that impact Mary are the €100 increase in the personal tax credit, the €100 increase in the employee tax credit, the tax band changes that save her €400 as she is a higher rate tax payer and the USC changes will save her €292. Combined these give a reduction in her tax bill of €892.
This means that Mary will have a shortfall of €708 next year.
Increases in the cost of living can feel abstract when expressed as a percentage. As we can see in Mary’s example, the forecast 3.2% inflation rate in 2024 will result in her being out of pocket by €1,600. If you add in the impact of this year’s running inflation rate of 6.3%, which is costing her €3,150, then she is in total out of pocket by €4,750 over the 2 year period 2023/2024.
Like Jimmy and Mary we are all suffering from a degradation in our living standards due to the cost of living increases. The government are partially mitigating this through budget measures. The rest will need to be addressed by all of us by working more hours, getting a pay rise or through reducing our cost of living – which may mean reduced standards of living.