I'll be brutally honest, my head spins when I need to focus on the tax system, it is a pure unadulterated bore for me, however it is a vital part of managing one's finances and financial planning, that's why I am putting myself through this pain for you! I'll also add that in researching this piece I came across many 'blogs' from accountancy firms & financial firms which were purely copied & pasted from the revenue website. This blog ain't, it's been created 100% from scratch for your eyes only!
In this week's episode we will share all there is to know about the basics of Income Tax in Ireland for our generation, and some really important pointers on things you can do to make sure you pay your fair share, and no more!
If you are new here please do check out this section to find out why Informed Decisions exists and what we are doing for our generation.
Podcast Version? Just Click Here:
We have touched on tax before, particularly in Podcast 13 where we outlined 7 key things you could potentially do to ensure you are on the right track with regards your tax allowances from tax you pay.
A Short Story:
Cindy is 30 years of age. She is big into keeping fit, meeting up with her mates as often as possible, keeping in touch with her parents and sisters and indeed spending time with her 'fella' Mike! She works for a large US company in Dublin City, a specialist in the Research department. Earning a salary of €52,000, with all the trimmings of pensions, income protection, subsidised canteen etc etc. As a millennial here in Ireland she is not that excited by Financial Planning and Personal Finance. Occasionally she will dip into an article about tax or pensions which grabs her attention online. She hadn't come across Informed Decisions (Financial Planning for Ireland's millennials!) at this stage so she was relatively unsure of the who topic.
One day, just as she was grabbing a cool drink after finishing her latest early morning spinning class in Dublin City before going to work she got chatting to one of her spinning class-mates. This girl, Janice, was big time keen on money, so much so that she still had her communion savings, and had them invested in low fee index funds with vanguard, she was a whizz! Janice asked Cindy how her Tax Credits were this year, and what rate of USC she paid last month (as you do!). Did Cindy have an answer? Damn right she didn't, she looked blankly at Janice, felt ashamed of her lack of awareness of what tax she was paying or whether she was availing of her correct credits.......she swore to fix that problem. She went and did her research, educated herself on what taxes she was paying on her income and indeed ensured she was availing of all of her allowances. The next time herself and Janice chatted, she knew all there was to know, and she nailed it....Well done Cindy!
Tax in Ireland:
Most of us have already heard the famous quote about death and taxes, and most of us realise that it's true! Tax is a drain, however it does go toward providing the services we get to enjoy every day of our lives. There are many forms of tax in Ireland, Capital Acquisition Tax, Capital Gain Tax, Inheritance Tax, Income Tax, Corporation Tax, Motor tax etc etc....It is fair to say that the majority of us would most often be exposed to Income Tax, so that's what we are going to deal with now!
To the best of my knowledge Income Tax originated in USA in the 1800's as a means to replenish US Government coffers following the 1812 War with Great Britain...(not to suggest we should blame either of these parties for our present tax burdens!). Up to that point the main taxes had been Import & Excise taxes. There was no such thing as Income Tax up to that point! And when they did introduce it it was at 3%.....imagine!
Joking obviously, we wouldn't waste our money on such items, would we!? I heard a line recently and thought it sums up the idea of buying new cars well.......'I prefer to keep my new car in my bank account'
Anyway, it obviously worked, and given the increasing demands and developments in transport and health care etc we all now have high expectations of the services we have access to. In order to pay for that and all that goes with it we pay comparatively high rates of Income Tax, and other taxes.
What Income Is Income Tax Payable On:
Pretty much all forms of income are subject to Income Tax. There are certain exemptions whereby certain forms of income are not eligible for Income tax, but which may need to be declared. For example if you have income from Maintenance Payments or Rental Income on a room you rent out in your home, you will usually not be subject to Income tax on that.
Income from employment is obviously subject to tax (no prizes there!). If you work for an employer then they are obliged to deduct this income tax from your salary and pass it over promptly to the Revenue. The amount of tax which you pay will be dependent on your level of income, but also on your personal circumstances and 'tax profile' for Revenue purposes.
If you work for yourself and are self employed then the onus is on you as an individual to deduct this tax and pay it to the revenue each year. That's the 'Tax Deadline' you will have heard of on the radio etc each year warning people who are registered for Income Tax to make their annual returns by 31st October each year. (also applies if you are PAYE worker but also have rental income or income from other source which can't be collected and paid at source). Bear that in mind if you are thinking about buying an Investment Property, you will need to make Income Tax returns each year on that income, and indeed all income (keep eyes peeled for future blog topic on this!).
What Taxes Must I Pay On My Income?
Universal Social Charge came to us in 2011 in place of the Income Levy. It is the first thing to be taken from your Gross Salary ( your pay before taxes!). If you earn over €13k per annum you will pay USC. It is payable on all income (except Social Protection & Maintenance Payment), irrespective of credits or allowances. The more income you have the more USC you pay. Once you cross over the €13k line you pay USC on all of your income, not just the amount over €13k.....here's the rates:
|0.5%||Up to €12,012|
|2.5%||From €12,012.01 to €18,772|
|5%||From €18,772.01 to €70,044|
|8%||From €70,044.01 to €100,000|
|8%||Any PAYE income over €100,000|
|11%||Self-employed income over €100,000|
Pay Related Social Insurance is a deduction taken from incomes which goes into a pot, which is in turn managed by Minister for Finance, and Minister for Social Protection. It is used to pay Social Insurance Payments, to ultimately support people who are not or cannot work.
PRSI is paid by us, and by our employers (if applicable) up to age 66. If you are employee in mainstream economy your are likely to be in Class A while if you are Self Employed you are most likely Class S (different classes have different rates/allowances, very complex!). There are credits for Gross incomes in the €350-400 per week range to reduce the impact of PRSI, but for all those above that level PRSI is charged at 4% of income.
Employers pay 8.5% Class A employer PRSI on weekly earnings up to €376 and 10.75% PRSI on weekly earnings over €376 Gross.
So there are the 'first 2' chunks we must pay on our incomes....now for the 3rd and largest, actual Income tax!
What determines my rate of Income tax? This is a really important question to ask yourself, as when it comes to Financial Planning here in Ireland the rate of tax we pay can have a large impact on what we can or can't do regards our lifestyles. Basically, the level of Income Tax you pay is dependent on the level of income you receive and whether you are single or married.
What is The Standard Rate Cut-Off Point?
The amount that you can earn before you start to pay the higher rate of tax (40%) is known as your standard rate cut-off point.
Here's the chart to show you what % you are paying on which portion of your income.
|Standard Rate Cut-Off Points 2017|
|Married couple/civil partners, one income||€42,800||Balance|
|Married couple/civil partners, two incomes||Up to €67,600(increase limited to the amount of the
second income - see example below)
|One parent family||€37,800||Balance|
If we go back to our Cindy example, she earns €52,000 we can see that Cindy would pay 20% on her first €33,800 ( =€6760) and then 40% on the balance above that (€52k - €33.8k = €18.2k) which amount to €7,280. Total Income Tax for Cindy therefore is €14,040.
What Is My Personal Tax Credit?
As I have hopefully made clear above tax is calculated as a percentage of your income, your tax credits are deducted from this to give the amount of tax that you have to pay. A tax credit therefore has the effect of reducing your tax bill by the amount of the credit you are eligible for. So what are they worth? Here is the main 3:
Single person Personal Credit €1,650
Married couple/civil partnership Credit €3,300
Employee/Paye Credit €1,650
So What Do I Need To Do To Make Sure I Get My Full Allowances? Income Tax Planning:
- Pension Contributions:
An employer’s contribution to an approved retirement benefit scheme or PRSA (Personal Retirement Savings Account) are not liable to the Universal Social Charge, but an employee's contributions are. So it might mean your employer will be willing to pay some in there for you!
As well as that, before they calculate your Income Tax they deduct any payments made to pensions, which is a good thing!
2. Use Your Allowances To The Full:
We all get an allowances & credits and they are typically applied automatically for us. If you are employed, it is taken into account when you are paid, and if you are self employed it is part of the calculation of your tax bill each year. But if you are a couple where only one partner is working, it could be that the non-working partner is not using their personal allowance. We will have a blog soon on the handling of tax for married/civil partners and whether to go single or jointly assessed and all that goes with that!
3. Permanent Health Insurance/Income Protection:
We covered this chappy here (what is Income Protection & SHould I Bother) but your premiums paid can reduce your taxable income. Very effective combo of tax relief and prudent personal protection!
4. Hire A Great Accountant:
As eluded to earlier, I ain't an accountant! Great accountants are masters at managing tax and ensuring you get access to all the benefits you should. Yes they cost some money but in my experience they can pay for themselves multiple times over for many of us by ensuring we are maximising these aspects.
For a list of all main forms of relief check out revenue website here.
Phew.......so there you have it, nearly 2000 words of tax info. If you are still reading I love and admire you! If you have got to this point I also feel you should share this article, and indeed sign up to our weekly email newsletter where I will send you an email each week to tell you about new blogs and podcasts available...do it here.
This was the hardest blog I have created to date, it really was but it's such an important aspect of our financial planning in Ireland that it had to be done! Enjoy and don't forget to join the movement.
You're a Legend!