Restriction on use of Tax Reliefs by Taxpayers with Higher Incomes

These measures aimed at limiting a taxpayer’s ability to significantly reduce their tax bill were introduced with effect from 2007.

The restriction when introduced potentially applied only to individuals with income in excess of €250,000. The provisions restricted the amount of specified reliefs (such as property based incentives and patent exemption) which a person can use to reduce their tax liability in any one year to 50% of the person’s income or €250,000 – whichever is higher. Tapering relief applied for incomes between €250,000 and €500,000. When the full restriction applied (on incomes in excess of €500,000) the individual had an effective tax rate on their total income of approximately 20%. The specified reliefs are listed in the Tax Act.

From the start of 2010 these restrictions have been tightened further so as to achieve an effective tax rate of c.30% where the full restriction applies. With effect from 1 January 2010 the restriction will potentially apply to individuals who have income in excess of €125,000 and the full restriction will apply to incomes in excess of €400,000. For 2010 et seq the amount of specified reliefs which a person can use to reduce their tax liability in any one year will be limited to 20% of the person’s income or €80,000 – whichever is higher. Tapering relief will apply for income between €125,000 and €400,000.

Specified reliefs not used in a particular year can be carried forward to the next year, subject to the same rules being applied in the following year.

This further tightening of the restriction for 2010 et seq will mean that these provisions will now impact on a much broader range of taxpayers. In many cases some action can be taken to reduce the impact of the restriction. Individuals likely to be affected should examine their position now and consider what action can be taken to alleviate the impact of these provisions on their tax position.