How your income tax is calculated

Introduction

Nearly all income is liable to tax. 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.

The Universal Social Charge (USC) is a tax on your income. It is charged on your gross income before any pension contributions or PRSI. You cannot use tax credits or tax relief (except for certain capital allowances) to reduce the amount you must pay. Find out more in our document on the Universal Social Charge.

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 your circumstances change during the year Revenue will issue a revised certificate.

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. You can get more information about tax and starting work or changing job.

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, 40% in 2017.

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. See case studies for an example of how to calculate income using tax rates and the standard rate cut-off point.

Standard rate cut-off points

2012, 2013 and 2014 / 2015, 2016 and 2017
20% / 41% / 20% / 40%
Single person / €32,800 / Balance / €33,800 / Balance
Married couple/civil partners, one income / €41,800 / Balance / €42,800 / Balance
Married couple/civil partners, two incomes / Up to €65,600
(increase limited to the amount of
the second income - see example below) / Balance / Up to €67,600
(increase limited to the amount of the
second income - see example below) / Balance
One parent family / €36,800 / Balance / €37,800 / Balance
Example of standard rate cut-off point for a married couple or civil partners with two incomes

In 2017, the standard rate cut-off point for a married couple or civil partners is €42,800. If both are working, this amount is increased by the lower of the following:

  • €24,800 or
  • The amount of the income of the spouse or civil partner with the smaller income

If one person is earning €48,000 and their spouse or civil partner is earning €25,000:

The standard rate cut off point for the couple is €42,800 plus €24,800. The increase in the standard rate band is not transferable between spouses or civil partners, so the first spouse or civil partner's tax bands would be calculated as €42,800 @ 20% = €8,560 and €5,200 @ 40% = €2,080. The second spouse or civil partner's tax bands would be calculated as €24,800 @ 20% = €4,960 and €200 @ 40% = €80.

Tax credits

Tax credits reduce the amount of tax that you have to pay. Tax credits are deducted after your tax has been calculated and so a tax credit has the same value to all taxpayers.

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. You can get more information about the different types of tax credits and reliefs and the tax reliefs available for people with disabilities. If you are entitled to tax credits that are not listed on the Notice of determination of tax credits and standard rate cut-off point that you get from Revenue, you should contact Revenue to inform them.

Tax allowances

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 40%, then the amount of your income that is taxed at 40% is reduced by €200 and so your tax reduction is €80 (€200 x 40%).
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 employing a carer for an incapacitated person
  • Tax relief on pension contributions
  • Guide Dog Allowance
  • Seafarer's Allowance

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 40%. 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.

Tax allowances have the effect of:

  • Increasing tax credits by the amount of the relief at the standard rate of tax. This grants relief at the standard rate of tax.

and

  • Increasing the standard rate band by the amount of the relief. This adds the difference between relief at the higher rate of tax and the standard rate of tax.

This ensures that relief is obtained in full at the higher rate of tax if applicable.

For example, a tax allowance of €1,000 would have a value of €200 to a taxpayer on the standard rate and a value of €400 to a taxpayer on the higher rate. The way this is calculated is to increase tax credits by €200 (1,000 x 20% standard rate of tax). This is the amount of the benefit to a standard rate taxpayer but the tax allowance would have a higher value for a taxpayer paying tax at the higher rate. This is achieved by increasing the standard rate cut-off point by €1,000. This means that for a higher rate taxpayer, €1,000 that would be taxed at a rate of 40% is instead taxed at 20%, a saving of €200 (€400 – 200 ) in addition to the €200 saved by the increase in tax credits. The increase in the standard rate cut-off point would not effect a taxpayer already paying tax only at the standard rate so he/she would only benefit from the increased tax credits.

Benefits in kind and non-PAYE income have the opposite effect:

  • Decreasing tax credits by the amount of the income at the standard rate of tax

and

  • Decreasing the standard rate cut-off point by the amount of the income.

This has the opposite effect to the example above. In this case, €1,000 would decrease the tax credits by €200, affecting both standard and higher rate taxpayers. It would also decrease the standard rate cut-off point by €1,000 having the effect of increasing the tax liability for higher rate taxpayers only.

Marriage or civil partnership

If you are married or in a civil partnership, this may affect your tax bands and tax reliefs. More information can be found on our document Taxation of married people and civil partners.

Contact

You can use one of the Lo-call numbers to contact Revenue. You can find more detailed contact details for your region here.

You can also view and update your tax details online.

Further information

Income that is assessed for tax

Under the PAYE system, income tax is charged on all wages, fees, perks, profits or pensions and most types of interest. Tax is payable on earnings of all kinds that result from your employment (including for example, bonuses, overtime, non-cash pay or 'benefit-in-kind' such as the use of company car, tips, Christmas boxes and so forth).

Money you get which is not liable to income tax may be liable to other taxes. If you get gifts or inheritances, you may have to pay Capital Acquisitions Tax. If you sell assets such as property or shares you may have to pay Capital Gains Tax.

Exemptions

Income that may be exempt from tax includes the following:

  • Payments to approved pension schemes
  • Statutory redundancy payments
  • Certain social welfare payments
  • Scholarship income
  • Interest from savings certificates and Savings Bonds and National Instalment Savings Schemes, within limits
  • Certain earnings by artists
  • Certain payments in respect of disabilities linked with Thalidomide
  • Wins from licensed lotteries
  • Certain army pensions and allowances
  • Payments made by the Health Service Executive to foster parents for the care of foster children
  • Some compensation payments under employment law
  • Compensation for personal injury that prevents an individual from maintaining herself. Income arising from the investment of such a payment is also exempt if it is the main source of income. Invalidity pension received as a result of the same injury is not included in assessing main income.

If you are on low pay you may not be liable to pay any tax because your tax credits and reliefs are more than or equal to the amount of tax you are due to pay. (There is no income tax exemption for low income earners under 65.)

You are completely exempt from income tax if you are over 65 and your income is below certain limits. Revenue's information leaflet Tax Exemption and Marginal Relief (IT 8) (pdf) gives information on available exemption limits and tax relief. If your income is over the limit then you may benefit from marginal relief.

Marginal relief

If your income exceeds the limits for low income exemption, but is less than twice the amount of the limit then you can claim marginal relief. Under marginal relief, you are taxed only on the amount by which your income exceeds the limit, but a special tax rate of 40% applies to this amount.

Example:
Cormac is 66 years of age and is married. His total income for 2016 was €40,000. Under the usual method of calculating his tax liability it would be €2,560 but under marginal relief it would be €1,600.

Under the usual method the tax liability is calculated as follows:
The income is below the standard rate cut-off point so all of it is taxed at the standard rate of 20%
40,000 x 20% = €8,000 gross tax

His tax credits are:
Married: 3,300
PAYE: 1,650
Age: 490
Total €5,440

The tax credits are subtracted from the gross tax to give the tax payable
€8,000 - €5,440 = €2,560

Under marginal relief the tax liability would be calculated as follows.
Total income: €40,000
Minus
Low income exemption limit: €36,000
Gives €4,000 as the amount by which the income exceeds the limit.
Marginal relief restricts the tax payable to 40% of this.
4,000 x 40% = €1,600