Revenue Tax Briefing Issue 41, September 2000
Tax Credit System 6 April 2001
Introduction
Employers will shortly receive an Information Leaflet which contains information on:
- The changeover to a tax credit system from 6 April 2001
- The introduction of a shortened tax “year” from 6 April 2001 to 31 December 2001 in preparation for a calendar tax year
- The change to a calendar tax year from 1 January 2002.
The purpose of this article is to give an overview of the tax credit system insofar as it relates to the operation of PAYE and to outline the main implications for employees / employers (and their advisors).
For details of the implications of the change to a calendar tax year see separate article on page 7 and 8
Tax Credit System from 6 April 2001
From 6 April 2001 the procedure for calculating tax on an employee’s salary will change. Tax Tables and Table Allowances will no longer be a feature of the PAYE system. The tax credit system will replace the existing tax-free allowance based system. In future, tax will be calculated at the appropriate tax rates on gross pay and the gross tax will be reduced by the tax credits due to arrive at the net tax payable. The new procedure will be as follows:
- The tax office will, in respect of each employee, notify the employer of the:
- standard rate cut-off point
- rates of tax, and
- tax credits
- The calculation of tax for each pay period is made by applying the information supplied in the notification against the gross pay (less superannuation) as follows:
- Gross pay is taxed at the appropriate tax rate(s) to give gross tax
- The standard rate of tax is applied to gross pay up to the standard rate cut-off point for that week or month. Any balance of pay over that amount in that pay period is taxed at the higher rate.
- The gross tax is reduced by a tax credit as advised by the tax office to arrive at the net tax payable.
Example 1
The following example illustrates the practical application of the procedure outlined above
A married couple (one spouse earning) have gross earnings of ₤50,000.
The tax office issues a Notice of Determination of Tax Credits (or tax deduction card, tape/diskette, as appropriate) showing:
Standard rate cut off point ₤28,000 p.a. = ₤538.46 p.w. |
i.e. based on a standard rate band of ₤28,000 |
Standard rate of tax 22%. Higher rate of tax 44% |
i.e. based on standard rate of 22% and a higher rate of 44% |
Tax credits of ₤2,288 p.a. = ₤44 p.w. |
i.e. equivalent to weekly Tax-Free Allowances under the current system |
The tax calculation for the first week would be as follows:
Gross pay |
₤961.54 |
i.e. Gross pay ₤50,000 /52 | |
Tax on ₤538.46 @ 22% = |
₤118.46 |
i.e. standard rate up to a maximum of the standard rate cut off point as advised by the Tax Office | |
Tax on ₤423.08 @ 44% |
₤186.15 |
i.e. higher rate on pay in excess of the standard rate cut off point | |
Total Tax |
₤304.61 |
i.e. sum of tax due at standard and higher rates | |
Less Tax Credit |
(₤ 44.00) |
i.e. tax credit advised by the Tax Office | |
Tax Due this week |
₤260.61 |
i.e. total tax less tax credit. |
Tax credits are non-refundable. They are used to reduce tax calculated on the gross pay. Any unused tax credits are not refundable. They are carried forward to subsequent pay periods. However, the cumulative basis of the PAYE system will, of course, continue to apply and any unused tax credits may be carried forward within the tax year.
Coded income and non-standard rated reliefs
Some employees may be liable for tax on non-PAYE income e.g. Benefit-in-Kind which is collected (“coded”) through the PAYE system. Some may have deductions e.g. expenses in employment, on which tax relief is due at the higher rate of income tax.
In calculating the tax credit, all the employee’s tax reliefs (whether tax credits or deductions) will be allowed at the standard rate of income tax. In this way, employees will get relief by way of tax credits at the standard rate of income tax on all their tax reliefs irrespective of whether they are formal tax credits or deductions from income, which for PAYE operational purposes are converted into tax credits.
“Coded” income and Standard Rate Cut-Off Point
Where an employee has non-PAYE income or benefits-in-kind (the tax on which is collected under the PAYE system) the amount of the tax credits is reduced by the amount of the non-PAYE income/benefit-in-kind at the standard rate of income tax and the standard rate tax band is reduced by the amount of that income. Example 2 below illustrates this point.
Example 2
An employee has a benefit-in-kind of ₤2,000. For the purposes of this example the tax rate bands and tax rates are as set out in example 1. The amount of the tax credit is reduced by ₤2,000 × 22%. The standard rate tax band is also reduced by ₤2,000 in arriving at the Standard Rate Cut-Off Point.
Non-standard rated reliefs and Standard Rate Cut-Off Point
Where an employee has deductions from income which qualify for tax relief at the higher rate of income tax, the tax credits will be increased by the amount of the relief at the standard rate of income tax and the standard rate tax band will also be increased by the amount of the relief. Example 3 below illustrates this point.
Example 3
A married couple (one spouse earning) have gross income of ₤50,000 and basic personal and PAYE tax credits of ₤2,288. For the purposes of this example the standard rate tax band and tax rates are as set out in example 1. Assume there is also qualifying expenditure of ₤1,000 in respect of expenses of employment (relievable at the higher rate of income tax) - the tax credit is increased by ₤220 i.e. ₤1,000 × 22% and the standard rate tax band is increased by ₤1,000 in arriving at the Standard Rate Cut-Off Point.
The adjustments required to arrive at the appropriate Standard Rate Cut-Off Point for individual employees will be made by the tax office and incorporated into the Notification of Determination of Tax Credits and Standard Rate Cut-Off Point.
Example 4
This example illlustrates the points raised above in relation to “coded” income and non-standard rated reliefs by showing how the tax office will calculate the tax credits and the Standard Rate Cut-Off Point in the circumstances outlined.
- A married couple (one spouse earning) have gross earnings of ₤50,000.
- The employee has a benefit-in-kind of ₤2,000 the tax on which is collected through the PAYE system.
- There is qualifying expenditure of ₤1,000 in respect of expenses of employment (relievable at the higher rate of income tax)
- For the purposes of this example the tax rate bands and tax rates are as set out in example 1.
- This example assumes a full 12 month tax year. For the short tax “year” the necessary apportionment will be made by the tax office.
The employee will receive a Notification of Determination of Tax Credits and Standard Rate Cut-Off Point.
The employer will receive a less detailed notification (or tax deduction card, tape/diskette, as appropriate) showing the bottom line information.
Calculation of Tax Credits - Example 4
Tax Credits |
₤ | |
Married |
9,400 @ 22% |
2,068 |
PAYE |
1,000 @ 22% |
220 |
Total |
2,288 | |
Increased by |
||
Expenses |
1,000 @ 22% |
220 |
Reduced by |
||
Benefit-in-Kind |
2000 @ 22% |
(440) |
Net Tax Credits |
2,068 | |
Euro |
2,625.82 | |
Weekly |
39.77 | |
Euro |
50.50 | |
Monthly |
172.33 | |
Euro |
218.81 |
|
Calculation of Standard Rate Cut-Off Point - Example 4
Standard Rate Cut-Off Point |
₤ |
Standard Rate Band |
28,000 |
Increased by |
|
Expenses |
1,000 |
Reduced by |
|
Benefit-in-Kind |
(2,000) |
Standard Rate Cut-Off Point |
27,000 |
Euro |
34,282.93 |
Weekly |
519.23 |
Euro |
659.29 |
Monthly |
2,250 |
Euro |
2,856.91 |
Note
The figures used in the examples in this article are for illustration purposes only.