Intro to Irish Taxation
Are you new to working in Ireland and confused by all of the terminology around your payslip? Or are you a new employer in the Irish market and need to get to grips with taxation elements that will affect your employees:
Below is a general overview of the statutory deductions relating to employees in Ireland. It is not a definitive guide to all exemptions and rules relating to these deductions. Similar to the UK, Irish employers must submit details of payments and deductions for employees to the Department of Revenue in “Real Time”. When processing payroll, the details of that payment are simultaneously submitted electronically to revenue. In turn, Revenue will issue a monthly statement electronically to employers for all payments due. The statement received from revenue should match the details already submitted by the employer. Revenue should be contacted immediately if any discrepancies. Employers are obliged to pay over any monies due for statutory deductions by the 23rd of the following month. The most straightforward payment method is by direct debit
Under Irish taxation the following deductions may apply to employees:
1. PAYE: Pay As You Earn (Income Tax)
2. PRSI: Pay Related Social Insurance
3. USC: Universal Social Charge
4. LPT: Local Property Tax
The Pay As You Earn (PAYE) system is a method of tax deduction under which an employer calculates and deducts any income tax due each time a payment of wages, salary etc. is made to an employee.
The PAYE system of tax deduction applies to all income from offices or employments (including directorships and occupational pensions) other than a few isolated cases where the employers concerned are given special instructions. A lot of social welfare payments are also subject to PAYE.
The following deductions may be made from gross pay before PAYE is applied:
- Ordinary Superannuation Contributions
- Additional Voluntary Contributions
- Revenue Approved Permanent Health Deductions
- Personal Retirement Savings Accounts (PRSA)
- Retirement Annuity Contracts (RAC)
- Salary sacrificed for a travel pass scheme or Cycle to Work Scheme
No other deductions made from pay should be taken into account in calculating employee taxable pay subject to PAYE.
An employee may claim a tax credit from Revenue for expenses that are wholly, exclusively and necessarily incurred in the performance of the duties of the employment.
If due, it will form part of their tax credits and standard rate cut off point and will not reduce the employee’s taxable pay as already calculated.
Revenue Payroll Notification (RPN)
Revenue Payroll Notifications (RPNs) are used to retrieve PAYE credits and cut off points and also USC rates and cut off points for new and existing employees electronically from revenue. Employers are obliged to check for new RPNs before processing each pay period.
NOTE: EMPLOYERS ARE TO OPERATE PAYE AND USC STRICTLY ON THE EMPLOYEE ASSIGNED RATES AND CUT-OFF POINTS AS ADVISED BY REVENUE IN THE RPN FILE, WITHOUT EXCEPTION.
Each employee is entitled to tax credits depending on their personal circumstances, e.g. married person’s or civil partner’s tax credit, employee (PAYE) tax credit, etc. These tax credits are used to reduce the tax calculated on an employee’s gross pay. Tax credits are non-refundable. However, any unused tax credits in a pay week or month are carried forward to subsequent pay period(s) within the tax year. They are not carried forward to the following year. 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. Each employee will have an annual tax credit which will be split equally over each pay period.
Standard Rate Cut Off Point (SRCOP)
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%. 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. The SRCOP is an annual figure that is split equally over each pay period.
The employer must operate PAYE in accordance with the Tax Credit Certificate/RPN (Revenue Payroll Notification) issued to them electronically by revenue.
When an employee commences employment, they should notify Revenue straight away (preferred method is through Revenue on line system), so that Revenue can notify the new employer of the tax credits and also USC rates to apply to that employee
BASIS TO APPLY PAYE
PAYE can be deducted on any of the following calculation methods:
- Week One/Month One
Year to date calculation of tax which ensures that an employee’s tax liability is spread evenly over the year. Each pay period tax deduction is calculated as the total tax due from 1st January to the date of payment and reduced by the amount of year to date tax previously deducted. This ensures that any tax credits and standard rate cut off point which are not used in a pay period are carried forward to the next pay period within that tax year. The cumulative basis facilitates the payment of tax refunds where due or the recuperation of an underpayment to revenue.
Week One/Month One
Each pay period is treated separately without any consideration of previous pay or deductions. The tax credits and cut off points are applied to each pay period and tax is deducted accordingly. No tax refunds/recuperations may be made by an employer where this basis applies.
An employer is obliged to operate emergency tax when they do not receive a Revenue Payroll Notification (RPN) for an employee.
RPNs will not be received when:
- An employee has not provided their Personal Public Service Number (PPSN).
PPSN’s are issued by the Department of Employment Affairs and Social Protection.
- Employee is not registered for Pay As You Earn (PAYE). (In the case of an employee who has not worked in Ireland before)
Employees will automatically be registered for PAYE when they register a job or pension using the ‘Jobs and Pensions’ service on Revenue on line. In order to do this, they require a PPSN and their employer’s PAYE registered number.
In an emergency tax situation, the employee will not benefit from any tax credits and will pay a higher amount of tax as a result. Once the employer receives the tax credit notification from revenue and the tax basis is “cumulative” the employer can process a refund to the employee once it is still during the same tax year. The refund will be offset against the employers liability for that given month so that they are in effect not out of pocket by facilitating the refund to the employee.
The basic simplified steps to calculating the PAYE deduction are:
Gross Pay – Calculate the Gross Pay subject to PAYE- (do any of the above allowable deductions apply?)
Gross Tax – Any pay less than or equal to the SRCOP, calculate at 20%
If the taxable Gross pay exceeds the SRCOP – calculate the balance of pay at 40%
Tax Credit – Reduce the Gross tax by the tax credit, reducing the tax payable
Balance – The remaining balance is the PAYE tax payable.
John Smith is single and earns €60,000 per annum. He is paid monthly and revenue have advised that his tax credits and cut off point are as follows: Annual Tax Credit: €3,300. SRCOP : €35,300 and that PAYE is to be applied on a cumulative basis. He does not contribute to a pension scheme.
To calculate John’s tax liability up to the month of October:
Gross Pay: €60,000/12*10 = €50,000
SRCOP: €35,300/12* 10 =€29, 416.67
Tax Credit: €3,300/12*10 = €2,750 (C)
First €29,416.67 @ 20% = €5,883.33 (A)
Balance (€50,000-€29,416.67) €20,583.33 @ 40% =€8,233.33 (B)
Tax Due Jan to Oct: A+B-C=€11,366.67
John would have been deducted PAYE each month in equal instalments of €1,136.67
Pay Related Social Insurance (PRSI) is a compulsory deduction from earnings which is payable to the Department of Employment Affairs and Social Protection (DEASP) towards the Social Insurance fund of the state which is used to fund social insurance payments in the state. Each periodical contribution creates an employee’s record of aggregate contributions which will in turn dictate the level of benefits available to that employee when applicable. The amount of PRSI you pay will depend on your earnings and the class you are insured under. Employers in addition will also make a PRSI contribution for each employee every time they are paid.
Social insurance contributions are divided into different categories, known as classes or rates of contribution. The nature of employment mainly determines the PRSI contribution class that applies to the employee. PRSI Class A applies to the majority of employees in the private sector and to employees recruited in the public sector since 6 April 1995.
PRSI is payable from age 16 to 66 (current pension age). Under Class A an employee does not pay PRSI in any week where they have earned less than €352. However, the employer’s share of PRSI remains payable as normal.
Once earnings exceed €352 in any week both employee and employer PRSI is charged. The employee rate is 4% of all earnings. However, employees receive a small credit (max is €12 per week) on earnings between €352 and €424. For earnings between €352.01 and €424 the maximum weekly PRSI Credit of €12.00, is reduced by one-sixth of earnings in excess of €352.01.
If you earn more than €424 per week you do not receive any PRSI credit. Employers will currently pay 8.7% of all earnings up to €352 and 10.95% on all earnings over €352.
Each PRSI contribution made in a pay week equates to a week of insurable employment, which contributes to an employees eligibility for any state related benefits such as Jobseeker’s Benefit, Illness Benefit, Maternity Benefit etc
PRSI is always deducted on a Week One/Month One basis, which means each pay period is treated separately. Employers should remit all PRSI collected to Revenue at the same time and in the same manner as the deductions under the PAYE system.
Jane Smith earns €375 per week and her PRSI Class is A. As this is above €352 she is liable for PRSI each week but is entitled to a credit as her earnings are less than €424.
Max PRSI credit due of €12 is reduced by one-sixth of earnings in excess of €352.01.
€375.00-€352.01 = €22.99/6 = €3.83.
€12.00-€3.83 =€8.17 (PRSI Credit)
PRSI Due Each Week = €375 @ 4% = €15.00-€8.17 = €6.83
- Universal Social Charge (USC)
The Universal Social Charge (USC) is a tax on income that replaced both the income levy and the health levy (also known as the health contribution) since 1 January 2011. It was brought in by the Irish Government during a time of crisis as a temporary measure but has remained in place. However, over the years the earnings thresholds have increased and the rated applied have decreased.
- USC is deducted if your gross income is more than €13,000 per year (2019 threshold). Once your income is over this limit, you pay the relevant rate of USC on all of your income.
- USC operates in the same manner as PAYE, varying by employee:USC rates and cut off points (COPs) are issued per employee
- Employers are advised of these rates and COPs along with the calculation basis on the Revenue Payroll Notification (RPN)
- Employers should not alter treatment from the RPN instruction.
- Employers should check for RPNs before processing each pay period.
- Employers should not change how an employee is treated for USC based on personal circumstances (medical card/over70)
- USC can be applied on a cumulative, week 1 or emergency basis.
- There are no credits that can be applied to USC.
It is NOT the responsibility of the employer to determine amendments to the operation of USC based on an employee’s personal circumstances. Where lower rates of USC apply in certain circumstances, for example, in the case of employees aged 70 and over whose aggregate income is less than €60,000, or where employees hold full medical cards whose aggregate income is less that €60,000, these lower rates will be stated on the RPN issued by Revenue. Where lower rates are not stated on the RPN file currently held, the employee should be advised to contact their local Revenue office in order to update their USC status with Revenue.
The 2019 USC exemption income threshold is €13,000. Where Revenue determines that USC exemption applies, it will be advised to the employer on the RPN file. The employer does not make any adjustment unless advised to do so via the RPN issued to them for an employee.
Where the employer holds an RPN which does not show exemption and the employee/pensioner advises them that USC exemption applies to them, the employee/pensioner must contact Revenue themselves to inform Revenue that their earnings will not exceed €13,000 in the tax year. Revenue will then issue a revised RPN to the employer with an updated USC instruction.
Once a new RPN is used to the employer which indicates that USC exemption is to be operated then any previous USC deducted will be refunded to the employee on the next payslip.
USC Emergency Basis
No cut off points are allowed. The emergency rate of USC is the highest rate applicable to a PAYE employee, currently 8% for 2019. While the rules applicable to emergency tax operable in PAYE include a standard rate cut off point for the first four weeks provided the employer has the PPS Number for the employee, for USC there is just a flat % rate (with no cut off point) applied to all payments.
All employees will be on the emergency basis for USC until an RPN Is received for them.
Standard rate of USC (2019)
Up to €12,012
From €12,012.01 to €19,874
From €19,874.01 to €70,044
From €70,044.01 and over
Self-employed income over €100,000
In the case of John Smith above his USC deductions to October would be as follows:
John’s earnings to October are €50,000.
USC due is as follows:
€12,012/12 * 10 = €10,010 @ 0.5% = €50.05
Next €7,861.99 (€19,874-€12,012.01) @ 2%= €157.24
Balance of €32,128.01 @ 4.5% = €1,445.76
Total USC due Jan to Oct: €1,653.05
John would have been deducted USC each month in equal instalments of €165.31.
- Local Property Tax (LPT)
LPT is a self-assessed tax charged on the market value of residential properties in the State. Liable persons must pay their LPT liabilities on an annual basis. The Revenue Commissioners are in charge of collecting the payment and have powers to chase those who attempt to avoid it.
How does LPT affect employers?
Householders can opt to pay their Local Property Tax (LPT) in one single payment or to phase their payments over the period January to December. One of the phased payment options being made available is deduction at source from salary or occupational pension.
To opt for deduction from Irish Salary, Wages or Occupational Pension the property owner provides:
- Employer or Pension Provider’s Name.
- Employer or Pension Provider’s Tax Registration Number.
If this option is selected, payment will be spread evenly over the period 1st January to 31st December. The amount of each instalment will depend on the number of salary, wages or pension payments the employee is due to receive in this period.
General Rules around making payment of the LPT through a salary deduction
- The Householder/employee cannot choose when the deduction starts. The employer must follow the instruction on the Revenue Payroll Notification (RPN) issued by Revenue and is required to start the deduction from the next pay period after the date of receipt of the RPN.
- Once the LPT deductions commence, the employer is obliged to continue the deductions and spread them evenly over the remaining pay days in the year. The employee cannot request that the employer pause the deduction, nor can the employer make this decision either.
- LPT cannot be deducted in any pay period for which the employee is not in receipt of payment. However, once salary payments resume employer will have to adjust the amount of LPT being deducted to ensure that the total liability is paid by the end of the tax year. This will result in a slight increase in the amount of LPT being deducted from the remaining salary payments in the tax year.
If there is an underpayment of LPT at the end of the tax year due to insufficient salary from which to deduct LPT then the outstanding balance due for payment will be settled between the employee and Revenue through another payment method (cash/cheque etc)
- Once an LPT deduction instruction is issued to the employer to commence LPT deductions from an employees payroll an employee can arrange an alternative payment method with Revenue if they wish. To establish how much LPT an employee/householder still has to pay for the tax year, the amount of LPT already paid by them through their wages (as confirmed on the payslip) should be subtracted from their total LPT liability for the year (as per RPN).
- Once the new payment method is confirmed, Revenue will send an instruction to the employer to stop deducting LPT for that employee by issuing a new Tax Credit Certificate (RPN).