Business 2000
SIXTH
taxation
Understanding Tax Credits and the PAYE System
Introduction
The taxes we pay go towards the cost of providing a range of
services that benefit the general public.These services include health
and hospital care, education, welfare benefits, Gardaí and emergency
services, housing and our national infrastructure (roads, etc).
Revenue’s core business is to collect, in an efficient manner, the taxes
that go to pay for these public services. A wide range of different
taxes, levies and duties (e.g. PAYE tax, Value-Added Tax collection,
excise duty, corporation tax) are administered by Revenue.
Revenue’s Volume of Business
Revenue receives 3.6 million items of correspondence, 4.3 million
telephone calls and over 850,000 personal callers to its 139 offices
every year. Its offices process in excess of 2.6 million payments with
much of the work being carried out at specific times of the year
(e.g. self-assessment income tax returns and payments must be in
by October, while PAYE claims are from January onwards).
Its website (www.revenue.ie) received over 10
million page "hits" in 2001. Thus managing
and controlling day-to-day operations is
a significant task, as is the efficient
collection of taxes.
Collecting Taxes & The
New Tax Credit System
Revenue is continually looking for ways to make the tax collection
system more efficient. The income tax year (which previously ran
from 6 April to the 5th of April) has been brought into line with the
calendar year to run from 1 January 2002 to 31 December 2002. In
addition one important change to the taxation system came into
being on 6th of April 2001 the tax credit system.
How does the new
Tax Credit system work?
A ‘tax credit’ is used to reduce tax calculated on gross pay and
replaces the old ‘tax-free allowance’ system. Tax credits are worked
out according to your personal circumstances and can depend on
whether you are a single, married or widowed person, or an employee
etc. Under the new Pay As You Earn (PAYE) Tax Credit system, every
employee is given tax credits and a standard rate cut-off point.The two
rates of tax for 2002 are 20% and 42%.
The Pay As You Earn or PAYE system is:
◗ a method of tax deduction where the employer calculates any tax due
and deducts it each time a salary is paid.
◗ a method of collecting pay-related social insurance contributions
The standard rate cut-off point is the amount of income that is taxed at
the standard rate of 20%. Any income in excess of the standard rate cutoff point is taxed at the higher rate of 42%.The current standard rate tax
band is 28,000 for a single or widowed person without dependent
children. The values of the various tax credits and the amount of the
standard rate cut-off points are determined each year in the Budget.
◗
◗
Weekly or monthly tax is thus calculated by applying the standard
rate of tax (20%) to gross pay up to the standard rate cut-off point
for that week/month,
Any balance of pay over that amount is taxed at the higher rate of
tax (42%).
The sum of these two figures represents the gross weekly or monthly tax.
This gross tax is then reduced by the tax credit to give us a net payable tax
figure.
Gross Tax - Tax Credits = Tax Payable
Tax Calculation
If we take a salary for a single person of 32,000 per annum and assume that
he/she is living in rented accommodation, under 55 and a PAYE employee, the
calculation for the tax liability with the relevant tax credits is as follows:
Personal Tax Credit
PAYE Tax Credit
Rent Tax Credit
Total Tax Credits
1,520
660
254
2,434
Source: Finance Act 2001
Gross Tax
If income is
is 28,000
32,000, standard rate cut-off point for a single individual
Gross Tax:
Balance
Total:
Less Tax Credits
Net tax liability
28,000
4,000
@ 20%
@ 42%
5,600
1,680
7,280
2,434
4,846
Standardisation of Tax Allowances
The Tax Credit system has been made possible because of a
standardisation of tax allowances, i.e. relief is granted at the standard rate
of tax and not at an individual’s highest rate of tax. What this system actually
means is that an equal amount of tax credit is available to all taxpayers.
Business 2000
sixth
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Your First Job - Joining
the PAYE Tax System
If you are over sixteen and an Irish national, you should already have
received details of your Personal Public Service Number (PPS No.), which
is issued from the Department of Social, Community and Family Affairs
prior to taking up your first full-time job. This number was previously
known as the Revenue and Social Insurance (RSI) number.
It is important when joining the
workforce for the first time that
arrangements are made to put your
tax affair s in order immediately.
When starting to work for the first
time the PAYE tax office should be
contacted to get the relevant Tax
Credit details. The tax office will require the PPS Number and the new
employer’s PAYE registered number, which is available from the wages
section of the company.
Employers need to have this information in order to calculate their
employees’ tax liability. If they do not have this information, new
employees will be charged what is called ‘emergency tax’.
A simple working equation to explain this system would be:
Tax Credits Due:
edition
This may mean that you will have more tax deducted from your salary than
is necessary. However, both you and your employer will be notified about
your Tax Credits so if you have been charged emergency tax, your employer
will refund this surplus tax when your tax credits have been established.
PRSI – Pay Related Social Insurance
PRSI is important as it entitles PAYE workers to social
welfare benefits. In addition to your income
tax, Pay Related Social Insurance (PRSI)
is deducted from your salary at
varying levels with the lowest
band of 6% (which includes 2%
for Health Contributions)
cover ing income up to
38,740.
All employees paying the
high rate of PRSI are entitled
to a weekly exemption of
127 per week, provided
the weekly income is in
excess of 287 ( 26 for
modified PRSI classes) while
individuals with a weekly income less
than 356 are exempt from the 2%
health contribution.
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PRSI Calculation
An employee in PRSI class A has a weekly wage of 400.The following is
the total PRSI and Health Contribution they will have to make that week.
As stated individuals paying the full rate of PRSI are entitled to a weekly
exemption of 127, provided their weekly income is in excess of 287.
PRSI Calculation
Wage
Less PRSI Exemption
Wage liable to PRSI
273 @ 4%
Wage liable to Health Contribution
400 @ 2%
400
127
10.92
8
Health Contribution Calculation, as the weekly wage exceeds the health
contribution threshold of 356 they are liable to pay 2% on the total
weekly wage. In this case the total PRSI and Health Contribution is 18.92.
Increasing Your Tax
Credits
In addition to tax credits such as the Single Person’s tax credit and PAYE
tax credit, other items can decrease or increase your tax credits. A benefitin-kind, for example, will reduce your tax credits.
A benefit-in-kind or non–PAYE Income occurs where an employee
receives the benefit of an expense incurred by his employer. Common
benefit-in-kinds’ are company cars, payments of medical insurance
subscriptions or vouchers.
Net Take Home Pay Calculation
In the case of a benefit-in-kind, tax credits are reduced by the amount of
the income at the standard rate of tax (20%) i.e if the benefit in kind is
200 then the individual’s tax credits are reduced by 40 ( 200 @
20% = 40). The standard rate tax band is also reduced by the amount
of the non-PAYE income.
Annual salary of 32,000. Individual is single, under 55, a PAYE employee
and living in private rented accommodation.
The following items will help to increase an employee’s tax credits;
Tax Credits Due:
Personal Tax Credit
PAYE Tax Credit
Rent Tax Credit
Total Tax Credits
1,520
660
254
2,434
Gross Tax:
Balance
Total:
Less Tax Credits
Net tax liability
Total PRSI liability
Income
Annual PRSI exemption
Total Health Contribution
Income
28,000 @ 20%
4,000 @ 42%
(
127 x 52 weeks)
5,600
1,680
7,280
2,434
4,846
32,000
6,604
25,396 @ 4%
1015.84
32,000 @ 2%
640
Tax relief for medical insurance premiums is made ‘at source’ so
subscribers pay a reduced rate of 80% of the gross premium, thus
benefiting from the tax relief at source.
Permanent Health Benefit Schemes
Where an employer deducts contributions from gross pay, tax relief issues
at source. In effect, the contributions made towards Health Benefit
Schemes will reduce gross pay for both tax and PRSI purposes.
Medical Expenses
Tax relief is available for qualifying medical expenses incurred by you
whether for yourself, a spouse, a dependent child or a dependent relative.
Trade Union Fees
In the budget of December 2001 a new tax relief was introduced for
subscriptions to Trade Unions. The maximum relief available is 130 per
annum at the standard rate of tax.
The changing of the tax year in line with the calendar year also allows
for a more logical accounting and budgetary administration.
The Tax Credit System has resulted in a number of key changes for
taxpayers. One such change is that in a number of cases, tax relief now
issues ‘at source’. For example, the contribution level for medical
insurance premiums is lower than before as subscribers on the
standard rate of income tax only have to pay a reduced premium (i.e.
80% of the gross amount) because 20% tax relief applies. Similarly,
Mortgage interest relief now issues in the form of a reduced monthly
mortgage repayment or, a simultaneous credit into the relevant bank
account (at the same standard rate of 20%).
Copies of all Revenue information leaflets can be obtained from any
tax office around the country, Revenue Forms and Leaflet Service at
Lo Call 1890 306 706 or via the Revenue website at
www.revenue.ie
Revenue Job Assist
tasks and activities
Tuition Fees
Tax relief at the standard rate is available for tuition fees for approved
undergraduate and postgraduate courses, as well as Information
Technology and Foreign Language courses. The Revenue information
leaflet IT 31 provides more details.
Gross Tax
Income 32,000, standard rate cut off point for a single individual is
28,000
Medical Insurance
Rent Relief
You can claim relief for rent paid for private rented accommodation. The
maximum amounts that you can claim for the current year, 2002, are as
follows:
Single
Under 55
Over 55
Widowed/Married
Under 55
Over 55
You can claim the relief by completing Form RENT1
Credit
254
508
508
1016
A special tax allowance at the marginal rate of income tax is available for
people who have been unemployed for one year or more who take up a job.
The allowance in year one of employment is 3,810 plus
1,270 for each
child reducing to two thirds of that amount in year two and one third in year
three.This allowance is also available for persons who have been in receipt of
either Disability Allowance or Blind Persons Pension from the Department of
Social Community and Family Affairs, for 12 months or more.
Conclusion & Benefits of
the Tax Credit System
The Tax Credit system equalises the value of tax credits for all PAYE taxpayers.
The system allows for ease of calculation and in several cases delivers relief
‘at source’ by actually reducing the amount of the gross
contribution a taxpayer is liable to pay. This
provides more immediate relief than the old
tax free allowance system.
1.
Outline how the PAYE tax system operates.
2.
Based on the case study illustrated on page 1 and
assuming that the Tax Credit levels and tax bands in the
case study illustration hold, calculate the tax payable (i.e.
gross tax less credits) for Joe a single male (living at home)
who earns 25,395 per annum.
3.
Calculate the net take home pay per month, for an
employee, from the following figures:
Annual gross pay
44,441
Total annual tax credits
9,732
(With PAYE deducted at 20% on 1st
28,000
and 42% on the balance and PRSI
levied at 6%).
Net Annual take home pay is 25,498.16 i.e.
32000 - ( 4,846 +
1,015.84 +
640)
Customer Service
It is important to update Revenue of any changes in your circumstances
that may affect your Tax Credits. Revenue sets down customer service
standards across all of its operations. In addition to making enquiries in
person at your local tax office, you can contact Revenue on PAYE LoCall
1890 60 50 90. This facility provides PAYE customers with access to a
National Virtual Call Centre.The services includes:
◗ issuing a Certificate of Tax Credits in respect of a new job
◗ updating your existing certificate of tax credits
◗ other general PAYE queries.
www.revenue.ie
The work in Revenue is both interesting and challenging. Revenue recognises that its principal asset is its highly skilled and motivated staff and invests heavily to ensure that they are able to reach optimum performance and individual
development. If you are interested in adding your skills to one of the largest teams in Ireland, it's advisable to check the 'Jobs Vacancies' page on www.publicjobs.gov.ie on an on-going basis.
While every effort has been made to ensure the accuracy of information contained in this case study, no liability shall attach to either The Irish Times Ltd. or Woodgrange Technologies Ltd. for any errors or omissions in this case study.
Business 2000
sixth
edition
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