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Gonzi’s third budget reads a different story line for middle to high income earners and lower wage earners, with the former seeing a creditable positive difference in their earnings that cannot compare with the miserly savings of the latter.
It is no secret that the adjustment in income tax bands has largely benefited the middle to high income earners with monthly tax savings that will leave a bigger jingle in their pockets. The savings might still fall below middle Malta’s expectations but they are still more generous than the savings enjoyed by lower income earners.
MaltaToday analysed the changes in tax bands for three typical families: a self-employed man who runs a retail outlet with a lot of help from his wife, an upper middle class family where both spouses cumulatively earn a wage of Lm16,280 and a lower income household with the husband being the sole bread winner earning a wage of Lm5,084.
The self-employed family stands to gain from the changes announced by Lawrence Gonzi whereby the spouse of a self-employed individual can now be registered as an employee of the family business. The amendments mean that Carmen, who spends hours helping out her husband Francis at the family shop can now have a formal wage, which will be deducted as an expense from the annual turnover.
Carmen can now pay national insurance, which is now also on a pro-rata basis for part-timers, which will entitle her to contributory social benefits.
The budget has left a positive impact on Francis and Carmen.
The same positive impact can be felt by Michael and Catherine, married with two children attending private school.
Both employed, Michael’s and Catherine’s wages reach Lm16,280 a year. They have until now paid Lm2,479 in income tax and benefited from Lm500 in credit for the tuition of their children in private schools.
But with Gonzi’s budget measures they will now pay Lm2,273 in income tax and benefit from a private school tax credit of Lm1,000. Including tax credits they would be benefiting from a monthly tax saving of around Lm58.
The story is totally different for Tony and Miriam. Earning Lm5,084, Tony today pays Lm117 in taxes every year. The budget will hardly change his income. He will only be benefiting from a tax saving of Lm2.50 per month.
To really make a difference to the family’s income, Miriam will need to find a job. Gonzi’s budget will enable Miriam to register for a minimal 20 hour per week part-time job for which she will only be paying national insurance on a pro-rata basis.
By sending their youngest child to a child care facility, Miriam and Tony could potentially also benefit from the Lm400 tax credit.
The budget could entice Miriam to seek productive employment but achieving a higher income means a different lifestyle for this family.
Low income example
Tony, 34, and Miriam, 33, are married with a two children of six and two years. Tony is an IT technician in a public corporation, while Miriam is a housewife: taking care of the kids does not allow her to work, as she cannot afford the childcare centre, and her grandparents are too old to take care of the children.
BEFORE
Husband Lm5,084 wages
Total income: Lm5,084
Total income tax: Lm117.6
The new income tax bands do little to affect the household’s income. Miriam decides to enter the labour market: she will save 50% on the NI contributions she would have paid under the older system. She decides to work 20 hours a week for Lm1.75 an hour, dropping off the toddler at childcare centre at 55c an hour – totalling Lm572 for the year. As a public sector employee, Tony now gets the civil service’s family benefits, and can claim Lm400 back for the childcare centre expenses.
AFTER
Husband Lm5,084 wages
Wife Lm1,820 wages
Total income: Lm6,904
Total income tax: Lm360.60
Lm400 (childcare rebate)
Lm572 (childcare costs)
Tony pays Lm2.50 less in tax every month with Gonzi’s measures but childcare subsidies enable Miriam to go out to work by leaving the 2-year-old at a centre.
If Miriam takes up the option she would contribute more income to the household, which would be enough to offset childcare costs, any additional taxation paid and leave her with more cash in hand. The change comes at a cost for the family’s lifestyle.
Middle income example
Michael, 45, and Catherine, 45, are married with two children, 10 and 14. Michael is an internal audit manager, while Catherine is a personal assistant to a managing director in a private company. Their children go to a private school. They declare separate tax computations.
BEFORE
Husband Lm7,780 wages
Wife Lm8,500 wages
Total income: Lm16,280
Total income tax: Lm2,479
The new income tax bands put more money in Michael and Catherine’s pockets, and the doubling of private school benefits makes it easier to fund their children’s education, with aids going up from Lm200 to Lm400 for their 10-year-old in primary school, and from Lm300 to Lm600 for their 14-year-old in secondary school.
AFTER
Husband Lm7,780 wages
Wife: Lm8,500 wages
Total income: Lm16,280
Total income tax: Lm2,273.60
Lm500 extra in private tuition grants from government
Both spouses are now paying Lm17 less tax every month, while receiving Lm500 more from the state to fund their children’s education.
Self-employed example
Francis, 32, and Carmen, 29, are married with no children. Francis is self-employed, running a retail store, where Carmen helps out but does not receive a formal wage. Under a joint tax declaration, total earnings are Lm10,000
BEFORE
Husband - Lm6,000 wages
- Lm4,000 profits
Wife - not paid a wage
Total income: Lm10,000
Total income tax: Lm1,268
Enticed by the new reforms, Carmen decides to register formally for work, earning the right to a pension by paying NI contributions. Francis pays her Lm3,000 in wages, which are deductible expenses and therefore means less profits, but also less tax for him. They choose a separate tax computation.
AFTER
Husband Lm6,000 wages
Lm1,000 profits
Wife Lm3,000 wages
(Non-taxable)
Total income tax: Lm10,000
Total income tax: Lm737.80
With both spouses on the payroll, together they are paying Lm44.18 less in taxes every month. |
