New income tax bands mean that workers won't pay tax on their first €12,000, Finance Minister Clyde Caruana announced in his budget speech, with the new bands set to slash workers’ tax payments.

The cuts have been widely hinted at over the past few weeks, with Robert Abela promising the “largest ever” tax cuts last weekend. The measure had also been promised in the weeks leading to the 2022 general election.

Lifting the veil on the cuts, Caruana explained that the lowest tax-free band will rise from €9,100 to €12,000 for a single person, meaning that they will save betwee €435 and €675 on their tax bill.

Married people, some 14% of all taxplayers, will see a similar rise in the tax-free income from €12,700 to €15,000. This means that they will save between €345 and €645 each year, Caruana said.

Meanwhile, parents will not be taxed on the first €13,000 of their income, up from the previous €10,500, bringing them savings of between €375 and €650 each year.

These tax cuts, together with an increase in children's allowance, mean that the average nuclear family of two parents and two children, will be left with an extra €1,800 in their pockets, Caruana said.

The new and old tax brackets.

Measure to cost €140m

The measure is set to cost some €140m to implement, he said, adding that the tax cuts were possible thanks to the government stepping up its tax collection efforts, recouping some €500m more last year than it did the year before, without touching the tax base

He also pointed out that the tax cuts were also possible because the government's costs for energy subsidies had dropped to 2.5% of total spending, from 5% four years ago when they were introduced during the Covid crisis. The subsidies will be retained unchanged. 

18,000 low-income workers will no longer pay tax

The cuts mean that some 18,000 lower-income workers who today pay the lowest tax rate of 15% will effectively no longer be taxed.

So while a low-income worker earning €11,500 annually, just above minimum wage, previously had to dish out some €360 of their meagre pay in income tax over a year, this will no longer be the case.

But higher-income earners will also receive a fatter paycheque at the end of the month, with the thresholds for the higher tax rates of 25% and 35% (and their corresponding deductibles)  also being tweaked.

Single workers will now need to earn at least €16,000 to pay 25% income tax, rising from the previous €14,500, with the thresholds for married workers and parents also rising by roughly €2,000.

Meanwhile, the threshold for the highest tax rate of 35% will remain at €60,000, but deductions are set to increase slightly.