Whether you’re starting your first job, changing careers or returning to work after a career break, you may be unsure of how the tax system works.
Learning about income tax, tax credits and how it is calculated may seem overwhelming, but it’s vital to ensure you are being taxed correctly.
To get you started, we’ve compiled a complete beginner’s guide to take the confusion and overwhelm out of taxes.
How tax is calculated in Ireland
Nearly all income is liable to tax and is generally deducted from your wages by your employer on behalf of Revenue. This is known as Pay As You Earn (PAYE). The tax collected by the government is used on public spending for things such as social welfare, hospitals and schools.
The amount of tax you pay depends on the amount of income you earn and on your personal circumstances. There is a range of income tax reliefs available that can reduce the amount of tax that you have to pay.
Tax is calculated as a percentage of your income each time you get paid. The first amount e.g. €40,000 (if your tax status is that of a single person) of your income is taxed at 20%, referred to as the standard tax rate. The remainder of your income (if any) is taxed at the higher rate of tax which is currently 40%. This calculates the tax due by you.
Your tax credits are then deducted from the tax due figure, reducing the amount of tax you have to pay.
Types of taxes in Ireland
Most of us concentrate on one main number on our payslips: the take-home pay, and just glance at the other figures on our payslips. But understanding these terms & why they are there is crucial to ensure you are being charged the correct amount of tax.
Let’s break these terms down together:
1) Income Tax: This is charged as a percentage of your income. There are currently two tax rates in Ireland; the standard rate (20%) and the Higher rate (40%). The first part of your income up to a certain amount is taxed at 20%, and the remainder is taxed at 40%.
2) PRSI (Pay Related Social Insurance): This funds social welfare benefits and pensions. Those earning less than €352 per week do not need to pay PRSI, while those earning more pay at a rate of 4%. Depending on your level of earnings your employer might also pay Employer PRSI on your behalf as well but this does not come out of your earnings.
3) USC (Universal Social Charge): This is a charge on your income and is calculated based on your gross income before any deductions such as employee pension contributions. Unlike income tax, you cannot use tax credits to reduce the amount of USC you pay.
Other familiar forms of tax in Ireland include Capital Acquisitions TAX (CAT) also known as Gift Tax or Inheritance Tax, Property Tax, Motor Tax and VAT (Value Added Tax).
Common tax terms explained
When it comes to tax; we believe knowledge is power, which is why we have compiled this jargon-free A-Z glossary of common tax terms.
Capital Gain: The profit from selling a capital asset such as land, buildings or shares.
Capital Gains Tax (CGT): A tax levied on the profit from the disposal of an asset.
Dependent: An individual who relies on another; for example, a child or unwell family member.
Emergency Tax: The tax an individual pays when it is unclear what tax band they should be assigned to. To avoid this, you should register your employer on your online Revenue record and request that they also register you as an employee as soon as possible when starting a new job – this way your employer is informed through their online Revenue system as to how much tax, PRSI and USC is due on your income and pay this to Revenue on your behalf.
Gross Income: The amount of income paid to an employee before any deductions.
Income Tax: A tax levied directly on income
Joint Assessment: When a couple in a marriage or civil partnership is jointly
Local Property Tax (LPT): A self-assessed tax paid annually by homeowners on the market value of residential properties.
Net Income: The total income after deductions have been made.
PAY As You Earn (PAYE): A system for paying income tax, USC & PRSI directly to Revenue on behalf of employees.
Pay Related Social Insurance (PRSI): Most employees in Ireland over 16 make social insurance contributions, and the amount you pay depends on your earnings and type of work.
Tax Credits: Sums that can be offset against a tax liability
Tax Relief: Reduces the amount of income tax due on earned income
Tax Band: The level of income at which an individual starts paying tax or a higher rate of tax.
Universal Social Charge (USC): A charge on income.
Helpful resources
Taxes for Returners
https://www.citizensinformation.ie/en/employment/starting_work_and_changing_job/training_and_looking_for_work/return_to_work.html
Income tax credits & reliefs
https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax_credits_and_reliefs/
How Income Tax is calculated
https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/how_your_tax_is_calculated.html
Emergency Tax (and how to claim a refund)
https://www.revenue.ie/en/jobs-and-pensions/emergency-tax/index.aspx
Registering a job or pension with Revenue
https://www.revenue.ie/en/online-services/services/paye-services/add-job-pension.aspx
Ready to learn more about taxes in Ireland?
You’ll love our latest podcast episode with Niamh De Búrca, Founder & CEO of SproutPlans.
Listen to the full episode here.
