Many of us are a little perplexed about the amount of tax that we pay here in Ireland. Trying to work out how the tax on your income is calculated can be very confusing to those who are not dealing with it on a daily basis.
So, for those who care, let me try to make it easy for you to understand.
In general terms, our income is subject to three different deductions.
So let's deal with each of these separately.
1. Income Tax
We have, for the most part, two different income tax rates in Ireland, 20% and 41%. Generally speaking, the first €32,800 of your income per year is taxed at 20% and anything above this amount is taxed at 41%. There may be adjustments to this amount if you are married and your spouse also has income. For example, as below, an income of €40,000 will have tax of €9,512.
Annual gross income €40,000
€32,800 @ 20% € 6,560
€7,200 @ 41% € 2,952
Total tax € 9,512
However, most people also have tax credits that they can use to reduce the tax payable. Every Irish resident receives an annual tax credit on €1,650 (Again, this may be increased if you are married). On top of that, if you are not self-employed and work for someone else, you get a further €1,650 tax credit per year. So taking the previous example, the net tax payable would be €6,212.
Tax on €40,000 € 9,512
Less tax credits:
Personal credit € 1,650
PAYE credit € 1,650
Net tax payable € 6,212
Depending on your own individual circumstances, you may be eligible for other tax credits to reduce the amount of tax payable such as:
2. USC
The Universal Social Charge is, essentially, another form of income tax. If you earn under €10,036 in a year, you will not pay any USC. As well as that, there are certain types of income which are not subject to USC including social welfare payments, deposit interest etc.
For most of us, there are three rates of USC - 2%, 4% and 7%. The first €10,036 per year is charged at 2%, the next €5,980 is charged at 4% while anything above €16,016 (i.e. €10,036 + €5,980) is charged at 7%. Again, using the example of an annual income of €40,000 per year, the USC deduction would be €2,119.
Annual gross income €40,000
€10,036 @ 2% € 201
€5,980 @ 4% € 239
€23,984 @ 7% € 1,679
Total USC € 2,119
There is no further credits to reduce the amount of USC payable on your income.
There is an additional 3% USC charge on any non-employment income in excess of €100,000 per year.
3. PRSI
PRSI is a form of social security contribution. Everyone's PRSI is primarily used to fund the social welfare payments made by the state to the unemployed, the elderly etc.
The calculation of PRSI is relatively simple compared to the other deductions mentioned above. For most of us it will be a straightforward 4% of our gross income. There are some exceptions to this such as those over 70, those on low wages and some people subject to modified PRSI rates. Going back to our €40,000 example, the normal PRSI deduction would be €1,600 (i.e. €40,000 x 4%).
If you are employed, your employer must also pay additional PRSI on your behalf at a rate of 4.25% or 10.75% depending on your level of gross wages. This amount is payable by your employer and should never be deducted from your wages.
Summary
Pulling our €40,000 gross income example together, we end up with total deductions of €9,931 (Income tax of €6,212, USC of €2,119 and PRSI of €1,600) and, therefore, net pay of €30,069 (Gross income of €40,000 less deductions of €9,931) in a year. In this case, that's an average tax rate of approximately 25%.
Annual gross income €40,000
€32,800 @ 20% € 6,560
€7,200 @ 41% € 2,952
Total tax € 9,512
Less tax credits:
Personal credit € 1,650
PAYE credit € 1,650
Net tax payable € 6,212
USC
€10,036 @ 2% € 201
€5,980 @ 4% € 239
€23,984 @ 7% € 1,679
Total USC € 2,119
PRSI
€40,000 @ 4% € 1,600
While this looks at income from a yearly point of view, you can also calculate it from a weekly or monthly perspective by simply dividing the rate bands (i.e. tax band of €32,800 and USC bands of €10,036, €5,980 and 16,016) by 52 (for weekly) or 12 (for monthly) and then multiply them by the current period.
For example, we are now in June. If you get paid monthly, divide €32,800 by 12 (€2,733) and multiply it by 6 (i.e. June is the 6th monthly period) and you get €16,400. This is the amount of income received in the year so far that is taxed at 20% while anything above it will be taxed at 41%.
If you think that you may have paid too much tax, get in touch with me and I should be able to tell you pretty quickly if you have indeed paid too much and how to get it back. You will need your most recent tax credit certificate as well as your most recent payslip. Don't forget that you can also still receive a refund of any over-paid tax for the previous four years.
Let me know in the comments below if you would like to see any other topics covered.
So, for those who care, let me try to make it easy for you to understand.
In general terms, our income is subject to three different deductions.
- Income tax
- USC (Universal Social Charge)
- PRSI (Pay Related Social Insurance)
So let's deal with each of these separately.
1. Income Tax
We have, for the most part, two different income tax rates in Ireland, 20% and 41%. Generally speaking, the first €32,800 of your income per year is taxed at 20% and anything above this amount is taxed at 41%. There may be adjustments to this amount if you are married and your spouse also has income. For example, as below, an income of €40,000 will have tax of €9,512.
Annual gross income €40,000
€32,800 @ 20% € 6,560
€7,200 @ 41% € 2,952
Total tax € 9,512
However, most people also have tax credits that they can use to reduce the tax payable. Every Irish resident receives an annual tax credit on €1,650 (Again, this may be increased if you are married). On top of that, if you are not self-employed and work for someone else, you get a further €1,650 tax credit per year. So taking the previous example, the net tax payable would be €6,212.
Tax on €40,000 € 9,512
Less tax credits:
Personal credit € 1,650
PAYE credit € 1,650
Net tax payable € 6,212
Depending on your own individual circumstances, you may be eligible for other tax credits to reduce the amount of tax payable such as:
- tax credit for medical expenses,
- single parent tax credit,
- rent credit etc.
2. USC
The Universal Social Charge is, essentially, another form of income tax. If you earn under €10,036 in a year, you will not pay any USC. As well as that, there are certain types of income which are not subject to USC including social welfare payments, deposit interest etc.
For most of us, there are three rates of USC - 2%, 4% and 7%. The first €10,036 per year is charged at 2%, the next €5,980 is charged at 4% while anything above €16,016 (i.e. €10,036 + €5,980) is charged at 7%. Again, using the example of an annual income of €40,000 per year, the USC deduction would be €2,119.
Annual gross income €40,000
€10,036 @ 2% € 201
€5,980 @ 4% € 239
€23,984 @ 7% € 1,679
Total USC € 2,119
There is no further credits to reduce the amount of USC payable on your income.
There is an additional 3% USC charge on any non-employment income in excess of €100,000 per year.
3. PRSI
PRSI is a form of social security contribution. Everyone's PRSI is primarily used to fund the social welfare payments made by the state to the unemployed, the elderly etc.
The calculation of PRSI is relatively simple compared to the other deductions mentioned above. For most of us it will be a straightforward 4% of our gross income. There are some exceptions to this such as those over 70, those on low wages and some people subject to modified PRSI rates. Going back to our €40,000 example, the normal PRSI deduction would be €1,600 (i.e. €40,000 x 4%).
If you are employed, your employer must also pay additional PRSI on your behalf at a rate of 4.25% or 10.75% depending on your level of gross wages. This amount is payable by your employer and should never be deducted from your wages.
Summary
Pulling our €40,000 gross income example together, we end up with total deductions of €9,931 (Income tax of €6,212, USC of €2,119 and PRSI of €1,600) and, therefore, net pay of €30,069 (Gross income of €40,000 less deductions of €9,931) in a year. In this case, that's an average tax rate of approximately 25%.
Annual gross income €40,000
€32,800 @ 20% € 6,560
€7,200 @ 41% € 2,952
Total tax € 9,512
Less tax credits:
Personal credit € 1,650
PAYE credit € 1,650
Net tax payable € 6,212
USC
€10,036 @ 2% € 201
€5,980 @ 4% € 239
€23,984 @ 7% € 1,679
Total USC € 2,119
PRSI
€40,000 @ 4% € 1,600
While this looks at income from a yearly point of view, you can also calculate it from a weekly or monthly perspective by simply dividing the rate bands (i.e. tax band of €32,800 and USC bands of €10,036, €5,980 and 16,016) by 52 (for weekly) or 12 (for monthly) and then multiply them by the current period.
For example, we are now in June. If you get paid monthly, divide €32,800 by 12 (€2,733) and multiply it by 6 (i.e. June is the 6th monthly period) and you get €16,400. This is the amount of income received in the year so far that is taxed at 20% while anything above it will be taxed at 41%.
If you think that you may have paid too much tax, get in touch with me and I should be able to tell you pretty quickly if you have indeed paid too much and how to get it back. You will need your most recent tax credit certificate as well as your most recent payslip. Don't forget that you can also still receive a refund of any over-paid tax for the previous four years.
Let me know in the comments below if you would like to see any other topics covered.
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