Working for Work : Chapter 5 : Income Tax & Social Insurance

Paying Tax

Most employees are Pay As You Earn or PAYE workers. In practice this means that any income tax you owe is deducted from your wages by your employer.

 

i It is your legal responsibility to ensure that your tax affairs are in order.

 

i Self-employed people are responsible for their own tax returns and should seek advice from the local tax office as to how the tax system operates for self-employed people.

 

i Unlike the social welfare system the tax system does not recognise co-habitation. This means that unless you are legally married you are treated as a single person for tax purposes.

Tax Credits and Tax Bands

Once you start a job the Revenue Commissioners should send you a 'Determination of Tax Credits and Standard Rate Cut-off Point Notice'. This notice gives you the information that will allow you to work out how much tax you will pay on your earnings. The tax year runs from the 1st of January 2011 to 31st December 2011, in line with the calendar year. The two main tax rates for the tax year that started on the 1st January 2011 are 20% (standard) and 41% (higher).

The Tax Credit system

Under the 'tax credit' system your liability for tax is calculated on your total gross income. You receive 'tax credits' based on your circumstances (see tax credits table below). These 'tax credits' are then deducted from your overall tax liability. The tax due is calculated by adding together any applicable tax credits and subtracting them from your overall tax liability.

While this might seem a little confusing at first, following the steps below and the general examples on the following pages you will find it easier to understand.

 

1. Calculate your gross income.

2. Calculate your tax liability. (See Tax Rates and Bands in this chapter)

3. Add together any tax credits that apply to your circumstances.

4. Subtract the amount of your tax credits (step 3) from the amount of your tax liability (step 2) to identify your yearly tax bill.

5. Divide the result of step 4 by fifty-two to obtain your weekly tax bill.

 

You may also be able to claim other allowances depending on your circumstances - please check with your local tax office - see chapter 7 or visit the Revenue website at: www.revenue.ie

Tax Credits 2011

Single Person's Tax Credit €1,650

Married Couple's Tax Credit €3,300

Home Carer's Tax Credit (maximum) €810

Widowed, qualifying for One Parent Family Tax Credit €1,650

Widowed (without dependent children) €2,190

One Parent Family Tax Credit €1,650

PAYE Tax Credit €1,650

Home Carer's Allowance for Married Couples

If you are married and your partner is working at home to care for your children under age 18, an elderly person or someone "permanently incapacitated by reason of mental or physical infirmity", you can claim the "Home Carers" tax credit. The full tax credit is €810 per year. If the Home Carer earns income of up to €5,080 in his/her own right for the tax year, the full tax credit may be claimed. Where the income is between €5,080 and €6,700 some measure of relief will still be given. If the home carer earns €6,700 or more for a tax year, then you cannot claim the Home Carer's Tax Credit. This tax credit is not available to married couples who are taxed as single persons.

Carer's Allowance is not taken into account when determining the home carer's income but it is a taxable source of income.

This means that if you are claiming Carer's Allowance, it will make up part of your jointly assessed income.

One Parent Family Tax Credit

The One Parent Family tax credit is made up of two parts; the single person's tax credit and the lone parents tax credit.

 

One Parent Family tax credit

Single Persons tax credit €1,650

Lone Parent tax credit + €1,650

Total tax credit = €3,300

An additional PAYE tax credit of €1,650 can be added to give a total of €4,950 in tax credits. Lone parents with income (including PAYE earnings and other sources) of less than €27,750 do not pay income tax

 

If a couple separate it is sometimes possible for both to qualify for the One Parent Family tax credit. The person seeking the One Parent Family tax credit must prove that the child lives with her/him for whole or part of the year. If either party cohabits s/he would not qualify for the tax credit.

PAYE

Pay As You Earn (PAYE) income tax is charged on a tax yearly basis (unlike PRSI, Income Levy and Health Contribution) so your tax credits are averaged out over the tax year. It is important to remember that if you take up a job at any stage in the tax year, you can still avail of your full annual allocation of tax credits. This is called 'cumulative' tax credits. You cannot carry credits into the next year.

Income from any source including employment, self-employment, pensions and some social welfare payments will be assessed for tax purposes. -

Every employee who is a Pay As You Earn (PAYE) worker receives an additional PAYE tax credit of €1,650 per year. Certain conditions may apply to proprietary directors, their spouses and children of proprietary directors - contact the Revenue Commissioners for more information. People availing of the Tax Exemption Limits have their PAYE credit already included in the Exemption Limits -

If you are paying a mortgage you are entitled to tax relief, which is applied at source i.e. the bank or building society credits tax relief and in this manner you get the relief. The Programme for Government proposed bringing forward the date for abolition of relief for new buyers to June 2011. The Programme also proposed to increase the rate of mortgage interest relief to 30% for first-time buyers who took out mortgages in the period 2004-2008. However, these measures in the Programme are unlikely to be introduced before Budget 2012.

There are a variety of personal credits available for widowed people, depending on the year of bereavement and the number of dependent children. - There are additional credits available for blind people, those with dependant relatives, incapacitated children and those who are incapacitated and employing a carer. There is also relief available for medical expenses, contributions to pension schemes and health insurance which is applied at source.

Example 1:

A single person with no children who is a PAYE worker has a personal tax credit made up of the following:

Single Person's tax credit €1,650.00

PAYE tax credit + €1,650.00

Total tax credits per year €3,300.00

Total tax credits per week €63.46

 

i At present, single people with a total annual income of up to €16,500 (including PAYE earnings and other sources) do not pay income tax. If their income exceeds €4,004 they ARE subject to Universal Social Charge.

 

Example 2:

A couple with no children, where one partner is a PAYE worker, has a personal tax credit made up of the following:

Married couple's tax credit €3,300.00

PAYE tax credit + €1,650.00

Total tax credits per year €4,950.00

Total tax credits per week €95.19

 

i At present, couples with one partner working and with a total annual income of up to €24,750 (including PAYE earnings and other sources) do not pay income tax. They will pay the Universal Social Charge.

 

Example 3:

A couple with no children, where both partners are PAYE workers, has a personal tax credit made up of the following:

Married couple's tax credit €3,300.00

PAYE tax credit (single credit of €1,830 x 2) + €3,300.00

Home carer's credit €6,600.00

Total tax credits per week €126.92

 

i At present, couples with both partners working and with a total annual income of up to €33,00 (including two PAYE earnings and other sources) do not pay income tax. They will pay the Universal Social Charge.

 

Example 4:

A couple with a child, where one partner is a PAYE worker and the other is a home carer, has a personal tax credit made up of the following:

Married couple's tax credit €3,300.00

PAYE tax credit + €1,650.00

Home carer's credit + €810.00

Total tax credits per year €5,760.00

Total tax credits per week €110.76

 

i At present, couples with one partner working and one partner caring for a child/children or elderly person in the home and with a total income of up to €28,800 (including PAYE earnings and other income sources) do not pay income tax. They will pay the Universal Social Charge.

Revenue Job Assist

If you are unemployed for one year or more and take up a job you may be entitled to an additional tax-free allowance under Revenue Job Assist. The scheme runs for three years and the tax-free allowance is tapered out over the three-year period at the following rates:

Revenue Job Assist -- tax free allowances

Year 1: €3,810 plus €1,270 for each child dependant

Year 2: €2,540 plus €850 for each child dependant

Year 3: €1,270 plus €425 for each child dependant

 

The Revenue Job Assist allowances are not restricted to the standard rate of tax and are subtracted from the tax owed on your gross taxable income.

To qualify for Revenue Job Assist you will have to satisfy certain conditions (see Chapter 4 for details). Your employer will also receive tax relief.

Income Tax Rates and Bands

There are two main rates of income tax, the 20% standard rate and the 41% higher rate. To work out how much of your income will be taxed at 20% and how much will be taxed at 41% you need to look at the income tax bands.

 

Tax Rates/Bands 2011

Single and widowed people without children €32,800 @ 20% balance @ 41%

Single and widowed people with children qualifying for:

One Parent Family tax Credit €36,800 @ 20% balance @ 41%

Married couple with one income €41,800 @ 20% balance @ 41%

Married couple with two incomes €65,600.(Max) @ 20% balance @ 41%

 

i The standard rate cut-off point for married couples for 2011 is €41,800 subject to an increase of up to €27,400 where both spouses are working. The increase is limited to the lower of €23,800 or the amount of the income of the spouse with the smaller income. The increase in the standard rate cut-off point interacts with the Home Carer's Tax Credit. However, if the increased standard rate cut-off point is more beneficial, you can claim the increased standard rate cut-off point instead of the Home Carer's Tax Credit. In practice your Regional Revenue Office will grant you whichever is the more beneficial.

 

Once your income goes over a certain level, you will start paying tax at the higher rate of 41%. This level is called a "tax band". Different tax bands apply to different types of household. For example: -

• A single person earning €26,000 per year will be taxed at the 20% rate only, if his/her income is less than €32,800 per year. All of the income will be subject to the Universal Social Charge. -
• A single person earning €40,000 will have the first €32,800 of his/her income taxed at the 20% rate and the balance of €7,200 taxed at 41% rate. All of the income will be subject to the Universal Social Charge.

The examples below give you a more in-depth idea of how the calculations are made (they do not include PRSI calculations):

Example 5:

John is single, with no child dependants. He is a PAYE worker and earns €22,000 gross per year. John's tax bill is calculated as follows (not including PRSI):

John's taxable earnings €22,000.00 -

Taxed @ 20% standard rate = €4,400.00

Tax due before John's tax credits are deducted €4,400.00

Single Person's Tax credit €1,650.00

Plus PAYE credit + €1,650.00

John's total tax credits €3,300.00

Tax owed before credits deducted €4,400.00

Minus John's total tax credits - €3,300.00

John's tax bill per year €1,100.00

 

Universal Social Charge

€10,036 at 2% €200.72

€16,016 - €10,036 (€5,980) at 4% €239.20

Balance (€5,980) at 7% €418.86

Total Universal Social Charge €858.52

Combined PAYE and Universal Social Charge €1,958.52

John's tax per week (€1,958.52 divided by 52) €37.67

 

Example 6:

Michael is single, with no child dependants. He is a PAYE worker and earns €40,000 gross per year. Michael's tax bill is calculated as follows (not including PRSI):

Michael's taxable earnings €40,000.00

Michael's earnings taxable at the standard rate = €32,800.00 -- taxed @ 20% standard rate = €6,560.00

Michael's earnings taxable at the higher rate = €7,200.00 -- taxed @ 41% higher rate = + €2,952.00

Total tax due before Michael's tax credits are deducted €9,512.00

Single Person's Tax credit €1,650.00

Plus PAYE credit + €1,650.00

Michael's total tax credits €3,300.00

Tax owed before credits deducted €9,512.00

Minus Michael's total tax credits - €3,300.00

Michael's tax bill per year €6,212.00

Universal Social Charge

€10,036 at 2% €200.72

€16,016 - €10,036 (€5,980) at 4% €239.20

Balance (€23,984) at 7% €1,678.88

Total Universal Social Charge €2,118.80

Michael's total yearly tax liability (PAYE + USC) €8,330.80

Michael's tax per week (€8,330.00 divided by 52) €160.21

 

Tax Exemption Scheme

There is a tax exemption scheme of benefit to people with incomes below certain limits. This applies to people both under and over 65.

Income Tax Exemption Limits for 2011

Under 65

Single/widowed €18,000

Married Couple €36,000

Qualified child increases -

First child €575 -

Second child €575 -

Third and subsequent children €830

 

i You cannot avail of the Tax Exemption Scheme and Revenue Job Assist at the same time.

 

Childminding Relief

Where an individual minds up to three children in the minder's own home, no tax will be payable on the childminding earnings providing the amount is less than €15,000 per annum. If the income exceeds that amount income will be taxable, as normal, under self-assessment. The exemption must be claimed in the annual return and must be accompanied by evidence that the service provider has notified the appropriate person, recognised by the Health Service Executive (HSE), that they are providing child-minding services.

Marginal Relief

If you are availing of the Tax Exemption Scheme and your annual income goes over the scheme's limits, you will pay tax at 40% on the additional income. This is called Marginal Relief. Although this is a very high rate of tax, the Tax Exemption Scheme may be of benefit to some people whose total income only slightly exceeds the limit. It is important that you check with the tax office to find out if the Tax Exemption Limits are better for you. For further information see leaflet IT8 -'Tax Exemption and Marginal Relief' (Revenue Commissioners).

Redundancy and the Universal Social Charge

Statutory redundancy payments are exempt from the USC. In addition, ex-gratia redundancy payments in excess of the statutory redundancy amount are exempt from income tax, and therefore also the USC, up to certain limits. These limits are up to €10,160 plus €765 per complete year of service in excess of the statutory redundancy. The basic exemption as outlined above can be further increased by up to €10,000 if the person is not a member of an occupational pension scheme.

Last Updated: 01/09/2011 ^ back to top