High Earner Restrictions


When this restriction was introduced in the Finance Acts 2006 and 2007 it was seen as a means of ensuring that “high earners” paid some tax on their income irrespective of the amount of tax reliefs available to them.  Briefly the reliefs restricted included, the various property reliefs, BES relief, film relief, exempt patent income, donations, etc.

At the time the restriction was aimed at individuals with income in excess of €250,000 and the restriction worked by limiting the specified reliefs which an individual could claim to the greater of €250,000 or 50% of the individual’s “adjusted income”.  The effect of this restriction was to ensure that the effective rate of tax paid would be in or around 20%

However Finance Bill 2010 has now broadened this restriction by lowering the minimum income limit whereby the restriction will apply from €250,000 to €125,000.  Additionally, it is seeking to increase the effective rate of tax from 20% to 30%.

So how does the restriction work?

There are several steps in calculating the restriction as follows:

  1. Calculate taxable income before any restriction is applied (T)
  2. Calculate the total amount of “specified reliefs” for the tax year (S)
  3. Add 1 and 2 to give an “adjusted income” figure (Y)

If adjusted income is equal to or greater than €125,000 and the amount of specified reliefs used in the year is equal to or greater than €80,000 – the restriction will apply.

  1. The restriction works by limiting the specified reliefs to the greater of:

–        A.  €80,000 or

–        B.  20% of the adjusted income amount, i.e. (Y)

The restricted amount is deducted from total of specified reliefs and the excess is added back to original taxable income figure to give an “increased taxable income amount”.  This is then taxed as normal.

If we take an example of someone with the following sources of income for the 2010 tax year we will see the effect that the introduction of these restrictions and the subsequent amendments has on the taxable income figure:

Rental income €600,000
Dividends €200,000
S23 relief €550,000

Calculation of tax liability if restrictions hadn’t been introduced:

Income
Rental income €600,000
Less S23 relief €550,000 €50,000
Dividends €200,000
TOTAL TAXABLE INCOME €250,000
Taxed as:
€36,400 @ 20% €7,280
€213,600 @ 41% €87,576
€94,856

Calculation of tax liability post Finance Acts 2006 & 2007:

Taxable income before restrictions (T) = €250,000

Total amount of specified reliefs for the year (S) = €550,000

Adjusted income (T + S) = €800,000

Restriction (Y) = amount of specified reliefs restricted to greater of €250,000 or 50% of €800,000 (adjusted income), i.e. €400,000

Revised taxable income = T + S – Y, i.e. €250,000 + €550,000 – €400,000 = €400,000

Taxed as:

€36,400 @ 20% €7,280
€363,600 @ 41% €149,076
Tax liability €156,356


Calculation of tax liability post Finance Act 2010:

Taxable income before restrictions (T) = €250,000

Total amount of specified reliefs for the year (S) = €550,000

Adjusted income (T + S) = €800,000

Restriction (Y) = amount of specified reliefs restricted to greater of €80,000 or 20% of €800,000 (adjusted income), i.e. €160,000

Revised taxable income = T + S – Y, i.e. €250,000 + €550,000 – €160,000 = €640,000

Taxed as:

€36,400 @ 20% €7,280
€603,600 @ 41% €247,476
Tax liability €254,75

As can be seen from these examples the difference in the taxable income figure from a starting point of €94,856 to a final figure of €254,756 is quite dramatic and will have an effect not just on current year liabilities but also on preliminary tax requirements.  With the new lower limit more people than ever will be caught by these restrictions.  Anyone who thinks they may be caught by these restrictions should contact us as soon as possible so that any additional liabilities can be quantified.