Budget 2025

As the final budget of the current Government, Budget 2025 is more than just a fiscal plan — it’s a political statement with a general election looming. With a substantial €8.3 billion package, an increase of €3 billion from last year, the stakes are high. This budget is expected to introduce generous tax and spending measures to win voters’ favour. However, much of this funding is already earmarked for existing commitments. Below, we outline key issues and potential measures the Government should consider to help individuals and SMEs while also enhancing Ireland’s attractiveness for foreign direct investment (FDI).

Scope for tax changes in Budget 2025

While the €8.3 billion budgetary package may seem generous, €5.1 billion of the additional public spending is already earmarked. This includes €1.2 billion for the Department of Health, €1.2 billion for the public sector pay deal, €1.3 billion for measures previously announced in Budget 2024, and €1.4 billion for additional capital spending. This leaves only €1.8 billion for new spending measures on Budget Day.

Additionally, much of the €1.4 billion taxation package will likely be used to offset inflation, costing an estimated €1.125 billion to adjust tax credits and the income tax standard rate band for expected wage inflation of 4.5%. This leaves little room for significant new tax measures unless additional revenue streams are identified.

Ease the tax costs of workers and entrepreneurs

The Government needs to ensure that workers are incentivised and productive, and one way to do so is to ensure that take-home pay is not over-taxed. Similarly, entrepreneurs are needed to deliver growth, but this cannot happen unless the after-tax return on investment makes their risk worthwhile. 

The recent Tax Strategy Group (TSG) papers noted the Programme for Government’s promise to eliminate the 3% USC surcharge on self-employed incomes over €100,000, (which currently brings entrepreneurs’ marginal tax rate to 55%). For workers, income tax measures to incentivise, retain and attract key talent, such as keeping the higher income tax rate aligned to average salaries, offering tax-efficient non-cash benefits via the small benefit exemption or through share-based remuneration would all be welcome.

In addition, we believe that the Government should adjust the standard fund pension threshold from its current limit of €2 million. The cap on pension savings subject to tax relief was introduced in 2005 at €5 million and initially, the tax served the purpose of discouraging excessive pension funding. However, as limits were not revised to keep pace with inflation, there have been a number of unintended consequences, and today the limits are impacting on a cohort of pension savers who were arguably never the intended targets of the initial legislation. Thousands of senior executives are now at risk of breaching the upper limit on Irish pension fund savings, leaving themselves open to punitive tax on those savings.

Support SMEs and private businesses

Supporting SMEs and private businesses facing cost pressures and administrative burdens must be a priority. Although the hospitality sector’s request to revert to a 9% VAT rate was dismissed as “unjustified” in the TSG papers, other forms of support are being considered for the broader SME sector. For instance, our pre-Budget submission suggests a temporary employers’ PRSI rebate for lower-wage workers. This could involve a 50% rebate for employees earning up to €26,000 for an initial 12-month period, helping businesses offset the cost of salary increases as employees transition to the Living Wage.

The SME sector, employing close to 1.2 million people, is crucial to the economy but has struggled to recover post-pandemic due to cost pressures, labour shortages and higher energy costs. Our pre-Budget submission proposes several tax measures to support private businesses, such as taxing interest earned on loans by angel investors at 12.5%, increasing the lifetime limit for Revised Entrepreneur Relief to €5 million, and removing cash as a non-qualifying asset for Capital Acquisitions Tax (CAT) business relief purposes. These pro-growth measures could significantly benefit the indigenous sector and reduce the country’s dependence on the multinational sector.

Simplify Ireland’s tax legislation

Budget 2025 must prioritise simplifying the tax code. Several areas need urgent attention, including interest deductibility rules and simplifying reliefs like the research and development (R&D) tax credit and Employment Investment Incentive Scheme (EIIS) to make them more accessible to SMEs.

Expanding real-time reporting to include non-taxable benefits and expenses has created a disproportionate compliance burden on employers. A shift to an annual reporting regime for such benefits would be more efficient.

Simplifying tax legislation would make Ireland more competitive and facilitate ease of business, positioning the country as a leader in the global ‘decluttering’ of tax rules movement.

Enhance Ireland’s FDI and financial services offering

Budget 2025 must outline a coherent strategy to enhance Ireland’s appeal for FDI. While the introduction of a tax exemption on certain foreign dividends is a positive step, broadening this exemption to include all dividends and foreign branch profits would further boost Ireland’s attractiveness as an investment location.

Tax policy is also crucial for supporting Ireland’s financial services sector, enhancing its competitiveness as a location for innovation and international business. Budget 2025 should prioritise tax measures that position Ireland as a hub for sustainable finance, such as introducing incentives for funds that invest in projects with significant positive environmental impacts. Additionally, reviewing the taxation of exchange-traded funds (ETFs) and addressing barriers to domestic household investment in funds could increase private investment in the retail market.

Address the housing crisis and climate transition

The supply of affordable housing will be a defining issue in the next general election. Economically, the housing crisis threatens future growth as it affects businesses’ capacity to attract and retain talent. A recent American Chamber of Commerce Ireland survey highlighted that housing is the biggest problem for US firms in Ireland, with nearly half citing it as their primary challenge.

Tax policy can help reverse this situation. PwC’s pre-Budget submission suggests measures such as extending the retrofitting scheme to modernise housing stock, reducing tax costs for businesses letting properties to staff at below-market rates, and developing incentives for carbon-efficient building methods, including modular homes.

Another critical growth area is the energy transition. Ireland aims to achieve climate neutrality by 2050 and reduce greenhouse gas emissions by 51% by 2030. Innovative tax policies to spur renewable energy investments and decarbonisation efforts are essential. Budget 2025 should introduce tax incentives and reliefs to promote clean technologies, renewable energy activities, and green industrial infrastructure. Additionally, the government can implement tax measures to encourage households and communities to adopt sustainable energy consumption and transport methods.

In summary, a final challenge for this Government

This final fiscal set piece represents a critical opportunity for the Government’s re-election hopes. Despite announcing a large budgetary package, the Government will struggle to meet the expectations of an electorate squeezed by high mortgage rates and cost-of-living pressures. Much of the additional spending is already accounted for, leaving limited fiscal flexibility on Budget Day.

From a long-term perspective, the housing crisis and climate transition remain paramount. Housing will be a pivotal issue in the next general election, compounded by concerns that Ireland may miss its 2030 emissions targets. The Government is under pressure to address these urgent needs, but finite resources mean not all interests can be satisfied. How the Government allocates this limited package could prove decisive come polling day.