The text below is a copy of an article I had in the Western People this week. Hope you find it informative!
PAYE SYSTEM IN IRELAND
Have you ever sat down and worked out the mechanics of how you get from your gross pay in your payslip to your net take home pay? In my experience most employees are happy enough to let their employer do the maths but perhaps you should take an interest as there are a sizeable number of people getting PAYE refunds in Ireland every year. The dreaded deductions between your gross pay and net pay include three “taxes” namely PAYE, PRSI and Universal Social Charge (USC) and I will briefly outline how these taxes are calculated below.
The place to start here is with your tax credit certificate. This will outline the tax credits, standard rate cut off point and USC band you have available to you. It is up to you to check the information on this certificate and if something is not right you must engage with the Revenue Commissioners to get it corrected. The standard rate cut off point available to single persons is €33,800. This means you can earn up to this amount annually and the rate of tax you pay will be 20% once you do not exceed this amount. If for example a single person earns €25,000 annually their gross tax liability will be €5,000 (€25,000 x 20%). If a single person earns in excess of €33,800 they will pay tax at a rate of 40% on the excess. For example, if a single person earns €40,000 per annum their gross tax liability will be €9,240 (€33,800 x 20% + €6,200 x 40%). The gross tax liabilities mentioned above are then reduced by the tax credits you have available to you. You are entitled to the single persons tax credit which is €1,650 per annum and if you are an employee you are also entitled to a PAYE credit which is worth a further €1,650. In total, the standard tax credits in Ireland for a single person is €3,300 – the aggregate of these two tax credits. In the above example the annual net tax liability of a single person on €25,000 per annum is €1,700 (€5,000 – €3,300) and the annual net tax liability of a single person on €40,000 per annum is €5,940 (€9,240 – €3,300).
This is the most simple calculation of all the taxes. Most employees in Ireland pay PRSI at class “A” which gives you an entitlement to many social welfare supports once you have been in the system and paying PRSI for a certain period of time. If you earn in excess of €18,304 annually you will have 4% deducted from your gross salary. For example, someone on €25,000 per annum will have an annual PRSI liability of €1,000 (€25,000 x 4%). If you earn below €18,304 you do not pay any PRSI.
The USC calculation is not so simple. There are four different USC rates as follows, 1.5% on the first €12,012 you earn annually, 3.5% on the next €5,564, 7% on the next €52,468 and 8% on any earnings in excess of €70,044.
Now that you are familiar with the workings of your payslip let’s look at some of the circumstances that PAYE refunds arise. The most common one is where your circumstances may have changed recently (eg) you may have got married and one spouse is not utilising all their tax credits and rate band so these can be transferred to their other half up to certain limits. You may have incurred medical expenditure including doctors and consultants expenses, prescriptions etc. Relief is available at a rate of 20% on these amounts but you must wait until the following year to process your claim (eg) you incurred qualifying medical expenditure in 2014, then you must wait until 2015 to process your claim with the Revenue Commissioners. There are other reliefs as well like tuition fees and rent tax credit but the Revenue Commissioners have reduced the availability of these claims in recent years. If you are making pension contributions outside of an occupational scheme you may also be entitled to tax relief on these contributions. Another way to generate a refund is to ensure you are claiming correct Sch E expenses. These are standard flat rate deductions applied to you depending on the nature of your employment. For example, teachers are entitled to an additional deduction on top of their standard bands and credits of €518 per annum. Accountants don’t get any extra allowance!
You will only be entitled to a PAYE refund if you have actually paid PAYE during a tax year. There are a sizeable number of people in Ireland that do not pay any tax so there is no point making application to the Revenue Commissioners if you haven’t paid any tax in the first instance. Finally, Revenue operate a four rule in relation to refunds so if you think you may be due refunds for the last few years now is the time to look into it so you don’t miss out.