Income tax is charge nearly all income as liable. Tax on income that you earn from employment is deducted from your wages by your employer on behalf of the Irish Government. This is known as Pay As You Earn (PAYE). The amount of tax that you have to pay depends on the amount of the income that you earn and on your personal circumstances. There are a range of income tax reliefs available that can reduce the amount of tax that you have to pay.
Notice of determination of tax credits and standard rate cut-off point
At the start of the tax year, the Revenue Commissioners will send you a Notice of determination of tax credits and standard rate cut-off point. This shows the rate of tax that applies to your income and the tax credits that reduce the tax payable. Revenue will also send a summary of this certificate to your employer so that your employer can deduct the correct amount of tax.
If you are changing job or starting work for the first time, and your employer has not received this information from Revenue or a previous employer, you will be taxed on a temporary basis called emergency tax.
Tax rates and the standard rate cut-off point
Tax is charged as a percentage of your income. The percentage that you pay depends on the amount of your income. The first part of your income, up to a certain amount, is taxed at 20%. This is known as the standard rate of tax and the amount that it applies to is known as the standard rate tax band.
The remainder of your income is taxed at the higher rate of tax, 41%. The amount that you can earn before you start to pay the higher rate of tax is known as your standard rate cut-off point.
Tax Rates and Bands 2008
Married couple One income
Married couple Two incomes
Up to €70,800 (increase limited to the amount of the second income)
One parent family
Tax allowances reduce the amount of tax that you have to pay. The amount by which a tax allowance will reduce your tax depends on what your highest rate of tax is. This is because the allowance is subtracted from your income before it is taxed. In effect, it is ‘taken off the top’ of your income which can then be taxed at either the standard rate or the higher rate, depending on your income level.
If, for example, you have a tax allowance of €200 and your highest rate of tax is 20%, then this means that the amount of your income that is taxed at this rate is reduced by €200 and so your tax is reduced by €40 (€200 x 20%).
If you have the same tax allowance of €200 but the highest rate of tax that you pay is 41%, then the amount of your income that is taxed at 41% is reduced by €200 and so your tax reduction is €82 (€200 x 41%). This is known as tax allowance at the marginal rate.
When your employer is taking allowances into account in calculating your income tax, the way that this is done is by adjusting your standard rate cut-off point.
Allowances at the marginal rate include:
- Tax relief on medical expenses
- Tax relief on employing a carer for an incapacitated person
- Tax relief on pension contributions
- Guide Dog Allowance
- Seafarers Allowance
credits reduce the amount of tax that you have to pay. They work differently to tax allowances because they are deducted after your tax has been calculated and so a tax credit has the same value to all tax payers. After your tax is calculated, as a percentage of your income, the tax credit is deducted from this to reduce the amount of tax that you have to pay. So a tax credit of €200, for example, will reduce your tax by that amount.
You may be entitled to various tax credits depending on your personal circumstances. If you are entitled to tax credits that are not listed on the Notice of determination of credits and standard rate cut-off point that you receive from Revenue, you should contact Revenue to inform them.
Calculating your tax
Before calculating your income tax, subtract the following from your income:
- Pension contributions
- Payments to a Permanent Health Benefit Scheme (to a maximum of 10% of income). This is a policy that will ensure continued income in the event of an accident, injury or sickness.
- Tax allowances
- Work expenses that were necessary to carry out your work duties.
Your taxable pay is then taxed at 20% of income below the standard rate cut-off point. The amount in excess of the cut-off point is taxed at 41%. This gives your Gross Tax. The value of your tax credits is then subtracted from this to give the amount of tax that you have to pay.
Factors affecting the standard rate cut off point
The standard rate cut off point may vary according to your personal circumstances. You may be entitled to tax allowances that will raise your standard rate cut off point. Alternatively, your standard rate cut-off point could be lowered. This could arise, for example, if most of your income is from your employer but you also have income outside this from which tax has not been deducted.
If you are married, this may affect your tax bands and tax relief.