Why do some investors pay more taxes than others?


This is a problem which is often highlighted as the budget approaches, but which continues to frustrate and perplex savers and investors; Why is a higher tax rate levied on earnings from lifetime funds and exchange-traded funds (ETFs) than on deposit accounts or stocks? And is it time for a change?

Investment tax rate

Depending on the instrument in which someone decides to save or invest, their final gain will depend not only on the performance of the underlying asset, but also on the tax rate that applies.

Dirt (deposit interest withholding tax) is levied on interest earned on savings from banks and credit unions at a rate that has varied considerably in recent years.

In 2008, for example, it was billed at a rate of only 20 percent. However, it was subsequently increased, peaking at 41% in 2016. Significant rate cuts followed more recently, as it fell to 37% in 2018 and 33% for 2020 and 2021.

This means that it is now equal to the Capital Gains Tax (CGT), which is also levied at the rate of 33 percent, and which applies to capital gains on shares.

However, investors in life insurance funds, which are sold by life insurance companies, as well as ETFs, often purchased through online brokers, are subject to a significantly higher tax rate. higher, called the exit tax, which is charged at the rate of 41%. .

It was not always levied at such a high rate: in 2008, the rate that applied was 23%, and it reached a rate of 41% at the same time as Dirt. However, it has not been reduced since.

Who pays the tax?

Depending on the scheme, some investors may avoid liability on their earnings. Some savers are exempt from Dirt, for example, including those over the age of 65 whose total income is below the income tax exemption limit, and those who are permanently incapacitated. due to mental or physical illness.

With the CGT, an annual exemption of € 1,270 applies, while investors can carry forward losses they incur to reduce the tax due on capital gains on subsequent investments. Investors who pay the lowest tax rate on their income will pay a lower tax rate on dividends earned on stocks, as these are subject to income tax.

With the exit tax however, the tax is paid by everyone, regardless of age, income or status. Not only that, but savers / investors in life insurance products must also pay a 1% life insurance tax, introduced in 2009.

And a recent amendment brought additional funds in the fold of the exit tax. Earlier this month, Revenue released a much-anticipated update on the tax treatment of ETFs. He specified that American ETFs, which were previously considered to be subject to the CGT regime, will, from January 2022, be subject to exit tax.

Tax return

So why the differential? As David Quinn, Managing Director of Investwise, notes, the decision to lower the Dirt rate to 33% was “an easy decision” for the government, as savers earn so little interest these days, which means that the tax is offering precious little tax to the Exchequer regardless of the rate.

On the other hand, reducing the exit tax rate would have a “much greater impact” on tax returns.

Indeed, the performance of the chessboard of Dirt went from a peak of 581 million euros in 2012 to only 37 million euros in 2020. And it is not only the state coffers that suffered: interest received by households rose from more than 1.1 billion euros in 2013 to 90 million euros in 2019.

On the other hand, the return on the exit tax rose from only 43.4 million euros in 2012 to 124 million euros in 2020. Although this figure is far from the peak of 247 million euros in 2015, the The inflated figure for that year was due to suspected disposals of SSIAs invested after the plan matured in 2007/08. Still, it’s still a much bigger income for the Exchequer than Dirt.


Given the gap that now exists between the exit tax and the CGT / Dirt – those who pay the exit tax are subject to a tax 24% higher than the CGT / Dirt – calls have continued in recent years in favor of harmonization of the regime.

Ahead of this year’s October budget, the Accounting Bodies Advisory Committee called for such a change, arguing that the eight percentage point difference in the tax treatment of savings products is “unjustifiable and is now time to correct this anomaly given the need to stimulate consumer spending ”.

Brokers Ireland, which represents financial advisers, made a similar argument in their submission, calling for a reduction of the exit tax to 33%, in accordance with Dirt and CGT “to ensure consistency and equality in the imposition of yields “.

He says there is “no logical reason” why interest on deposits should be taxed at a lower rate than yields on savings and investment contracts, or why these contracts should be taxed at a rate. higher than those subject to the CGT regime.

He also wants the 1% tax to be abolished and has proposed a new incentive program for environmental, social and corporate governance (ESG) funds, under which investors in such products for life would be subject to an exit tax of 33%.

“This would stimulate greater adoption of ESG investing among the Irish public, while its budgetary cost is expected to be modest,” the association said.

Quinn agrees that the exit tax rate is “high criminal”, especially for investors in low risk funds.

While investing directly in stocks is an important tool for many, the view is that taxes shouldn’t be the reason risk-averse investors, who can do better in a diversified fund, invest this way. .

Quinn can understand why the exit tax may have to be higher than the CGT, as dividends are allowed to grow tax-free under the gross cumulative regime in these funds, while dividends earned on stocks are subject to income tax on an annual basis.

However, he argues that the differential should not be that high and would like the exit tax to be reduced to 36%.

Government approach

Despite the drop in the rate, the government seemed reluctant to make any changes.

In 2017, for example, in the tax strategy papers released by the Ministry of Finance, it was stated that the reason the exit tax was not reduced at the same time as Dirt was because of the cost. At the time, Revenue estimated that a two percentage point tax cut would cost around $ 11 million per year in lost taxes, while aligning the tax to Dirt would cost $ 22 million.

Subsequently, however, the Ministry of Finance released a report in 2018 saying it was not a matter of cost. On the contrary, he concluded that the products subject to Dirt or exit tax are different in several respects, namely “the level and application of charges to customers, the level of risk and return and the potential losses. , and therefore the way in which they are taxed ”.

But last year, costs emerged as an issue again, with tax strategy papers noting that due to “current fiscal pressures” the possibility of reducing the exit tax “is drastically reduced.” He also added that this was particularly the case, “given the lack of evidence to support any rate distorting effect,” which goes against what the industry claims.

Brokers Ireland argues that the current system can distort investor decisions, noting that investors who are willing to take a risk “benefit from a lower tax rate and a more favorable tax regime. if they invest directly in real estate, stocks and stocks ”.

“There is no logical reason for such discriminatory tax treatment,” he said. Likewise, Quinn says the current regime is pushing investors to find ways to apply capital gains tax to their investments.

“It’s a shame that the tax system somehow dictates what instruments people use. It shouldn’t be like that, ”he said.

For now, however, while still possible, then it seems unlikely that Paschal Donohoe will take such steps to appease the industry for the benefit of savers / investors on Budget Day next month.

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