The rumour mill continues to turn in the lead-up to Budget 2015, and with less than a week to go till the day of truth, we decided to take a look at a tax-break option which has consistently been the dark horse in the Budget race.
Today we’ll examine what would happen if tax credits were increased, and evaluate the savings to you across a range of income levels.
As we have one of the most progressive tax systems here in Ireland, PAYE workers in Ireland are entitled to two basic tax credits:
1. A fixed PAYE Tax Credit worth €1,650 which is specific to the individual working
2. A transferable Personal Tax Credit worth €1,650 which married couples can share
These tax credits are deducted off your total tax bill.
Increasing Tax Credits for A Single Person
When the PAYE Tax Credit and the Personal Tax Credit are combined, a single person is eligible for a €3,300 reduction off their tax bill. At the moment Income Tax for a single person looks like this:
| Salary €18,000 | Salary €26,000 | Salary €34,000 | Salary €42,000 | |
| 20% first €32,800 | 3,600 | 5,200 | 6,560 | 6,560 |
| + 41% over €32,800 | – | – | 492 | 3,772 |
| Total Tax | 3,600 | 5,200 | 7,052 | 10,332 |
| Minus tax credits | -3,300 | -3,300 | -3,300 | -3,300 |
| Income Tax Due | €300 | €1,900 | €3,752 | €7,032 |
Proposed changes to tax credits include two options. The first speculated possibility is to increase the PAYE Credit by €100 bringing the tax credit to €1750. The other route is to increase the Personal Credit by €100 bringing this credit to €1750. The Government can choose which credit to increase, either way, this would mean a single person would then be entitled to a €3,400 reduction off their tax bill, meaning both of these increases result in the same saving for the tax payer of €100 per year.
Increasing Tax Credits for A Married Couple – Equal or Similar Salaries
A married couple in PAYE employment is entitled to €3,300 each, doubling their tax credits to €6,600. The threshold at which they start paying 41% tax also doubles to €65,600 for combined incomes, subject to a maximum of €41,800 for the highest income earner. At the moment, the Income Tax for married couples with equal wages would look like this:
| €18,000 x 2 = €36,000 | €26,000 x 2 = €52,000 | €34,000 x 2 = €68,000 | €42,000 x 2 = €84,000 | |
| 20% first €65,600 | 7,200 | 10,400 | 13,120 | 13,120 |
| + 41% over €65,600 | – | – | 984 | 7,544 |
| Total Tax | 7,200 | 10,400 | 14,104 | 20,664 |
| Minus tax credits | -6,600 | -6,600 | -6,600 | -6,600 |
| Income Tax Due | €600 | €3,800 | €7,504 | €14,064 |
As with the single person, the proposed changes to both PAYE and Personal Tax Credits would result in an equal saving for the tax payer of €100 per year. The only difference for a married couple being the annual saving would double to €200.
Increasing Tax Credits for A Married Couple – One Large Income, One Smaller Income
Where one spouse earns higher wages than the other, say for example, if one is working part-time to look after kids, the person earning the higher wage can earn up to €41,800 before they start paying 41% Income Tax. The Income Tax for married couples where one partner is the main earner looks like this at the moment:
| €18,000 + €8,500 = €26,500 | €26,000 + €8,500 = €34,500 | €34,000 + €8,500 = €42,500 | €42,000 + €8,500 = €50,500 | |
| 20% first €65,600 | 5,300 | 6,900 | 8,500 | – |
| 20% first €41,800 per individual | – | – | – | 10,060 |
| + 41% over €41,800 per individual | – | – | – | 82 |
| Total Tax | 5,300 | 6,900 | 8,500 | 10,142 |
| Minus tax credits | -6,600 | -6,600 | -6,600 | -6,600 |
| Income Tax Due | €0 | €300 | €1,900 | €3,542 |
Here again, we see any increase to either PAYE or Personal Tax Credits would result in the tax payer saving the same amount per year as the Tax Credit Increase itself. In the examples above, the annual saving would be €200.
According to the Irish Tax Institute, the cost to the Exchequer is €57.6m cheaper if the Government increase the PAYE Tax Credit, rather than Personal Tax Credit (the PAYE credit only applies to individuals in PAYE employment, but Personal Tax Credits can be claimed by those in self-employment).
The savings from the PAYE Tax Credit increase are also on par with the annual savings of €100.36 across all incomes if the lower rate of USC were to be reduced to 1%. However, reducing the USC rate would cost €63 million more to the Exchequer, so increasing the PAYE Tax Credit could be the answer!
To have our experts check your taxes for a refund before Budget Day, apply now.
Written by Alexandra Byrne.
I’m what you call an all-rounder! Having worked in customer services, accounting and now in marketing, I’m the one who can tie all the pieces of the puzzle together. I’ve a BSc from University of Limerick so I’m analytical, but I also love change! I’m constantly astounded by the lack of awareness we Irish have about our entitlements, and I like spreading the word about tax refunds – so as many people as possible can claim everything they are entitled to.