Tax rate on savings interest to reach as high as 45% after PRSI levy

The effective tax rate on interest earned on savings is likely to soar to 45 per cent as the new higher rate of Deposit Interest Retention Tax (DIRT) and the Pay Related Social Insurance (PRSI) levy on unearned income will both come into effect from 1st January 2014.
 
Finance Minister, Michael Noonan confirmed in the budget that the DIRT rate would be increased to as high as 41 per cent. However, a second tax is reportedly set to operate in conjunction with the DIRT tax to be applied to unearned income such as earnings from rents, dividends, shares and deposit interest.
 
On top of the DIRT rate, the PRSI levy of four per cent was announced in last year’s budget and will apply to all residents under the age of 66 with unearned income.
 
The four per cent charge will be placed on unearned income above €3,174 a year.
 
A spokesperson for the department said: "In Budget 2013 it was announced that from Jan 1, 2014, the exemption from PRSI applying to employed contributors and occupational pensioners aged under 66 years, whose only additional income is unearned income, will be abolished.
 
"This means that unearned income such as rental income, investment income, dividends and interest on deposits and savings will be liable to PRSI."
 
Although the new PRSI levy is to be paid directly into the social insurance fund, there will be no benefits to those who pay the tax.
 
"The new PRSI change will be at four per cent. It will not give rise to any social insurance entitlements," the spokesperson added.
 
Austin Hughes, chief economist with KBC, believes that most people will continue to save towards a pre-determined target, but at the margins some will be less inclined to put money to one side.
 
"I don’t see it unleashing a flood of consumer spending," added Hughes.

Date published 18 Oct 2013 | Last updated 18 Oct 2013