Budget 2016: could price of cigarettes be hiked to €10.50 to help fund USC cut?

The cut in the controversial USC is set to form the centrepiece of the Budget. Reducing the tax is part of a plan to cut the marginal rate to below 50pc, it has been learned.

This country now has one of the highest marginal rates of income tax in Europe.

It is also understood that the entry point at which people begin paying will be raised in order to bring to more than 500,000 people out of the USC net, along with cutting the main 7pc rate.

The aim is to remove a further 90,000 from the USC by increasing the threshold in Budget 2016.

But big gains will be in store for middle-income earners from cutting the main 7pc USC rate.

Around 1.28 million taxpayers will gain from a reduction in the USC's main rate.

People earning up to €70,044 pay the main 7pc rate. Dropping the main rate to 5pc would see all these people make big gains.

A single earner on €36,000 would gain around €374 a year if the main rate comes down by two percentage points, according to calculations by the Irish Tax Institute.

Someone earning €75,000 a year would gain €1,049 a year.

This would meet Finance Minister Michael Noonan's criteria to ensure that income tax changes only benefit what he considers to be middle earners - those earning less than €75,000.

In recent days, Children's Minister Dr James Reilly has been pushing for an increase of at least 50c in the price of a pack of 20 cigarettes, coalition sources revealed. This would bring in an additional €63m in revenue.

It is expected that the extra revenue will used to part-fund the reduction in the USC rate, which is expected to cost around €150m.

"The revenue from more tax on cigarettes will help fund a cut in the USC of 2pc, rather than the original plan for a 1.5pc reduction," a source familiar with the situation said.

Cutting the USC rate by two percentage points would bring the marginal tax rate to 50pc from the 52pc for PAYE (pay as you earn) workers now.

Bonus

The marginal rate is the amount of tax that people pay on what is regarded as higher rates of pay. However, in this country, it kicks in at €32,800 for single earners.

The Government is also seeking to increase the €12,012 USC entry point by €1,000, a move that would mean thousands of workers would no longer have to pay it.

Some 300 new teaching posts will be created in September as the Government moves to reduce the pupil-teacher ratio.

Senior government sources have indicated that the ratio, currently set at 28 pupils per every teacher, will be cut by one after next Tuesday's Budget.

The cut, which has been secured by Education Minister Jan O'Sullivan, is due to come into effect from September of next year as around 300 new teaching posts are created.

Class sizes were increased during the crash but senior Government sources have confirmed that Ms O'Sullivan is set to deliver the good news of reduced class sizes.

Ms O'Sullivan has repeatedly said that reducing class sizes was a "major priority" for her and she has strong support from her Fine Gael colleagues to fund the additional posts.

Further details of Tánaiste Joan Burton's welfare package for the elderly have also emerged.

It has been confirmed that there will be an increase in the Christmas bonus to €115 per pensioner and €220 per couple.

Fine Gael has lost the battle on getting a €5 increase to the old age pension. There was strong support for an increase, but Ms Burton and her officials have refused to accede to their demands, instead focusing on other measures for elderly people.

It is understood that the Tánaiste is prioritising the restoration of the Christmas bonus, which she sees as a major boost to pensioners.

She is also likely to increase the Living Alone allowance, but late last night it emerged that Ms Burton is seeking to increase the €1,375 respite care grant.