In two weeks, the Revenue Commissioners will change the way it looks at your tax forever. The allowances and tax tables system will be scrapped and replaced by a new tax credits system beginning on April 6th.
There is a straightforward new formula for calculating your tax bill: gross tax less tax credits equals tax payable. The examples below should make it clear how to calculate gross tax and tax credits. Finance Minister Mr McCreevy contends that the new system is more equitable because tax relief will now benefit each individual by the same amount. It is also simpler once you become accustomed to it. Most PAYE tax payers should have received a Notice of De- termination of Tax Credits and Standard Rate Cut-Off Point document from the Revenue. Despite the long title, this is merely the equivalent of the old tax-free allowance certificate.
This notice will show a breakdown of all tax credits and will list the weekly, monthly and annual standard rate cut-off points.
Standard rate cut-off point: This is the level up to which an employee pays the standard 20 per cent rate of tax. Anything above this is taxed at the higher 42 per cent rate. The cut-off point is calculated by the Revenue and can vary from person to person depending on their individual circumstances. The main categories for tax purposes are:
- single/widowed without dependent children; - single/widowed qualifying as a one-parent family; - married couple, one spouse with income; - married couple, both spouses with income.
As the system is streamlined, issues such as benefit-in-kind, non-PAYE income, mortgage interest relief and allowable employment expenses are all incorporated into an individual's tax credits and standard rate cut-off point. This information should be listed on the tax notice. The employee gets the full breakdown but only the summary figures, showing the total monthly and weekly tax credits, are issued to the employer.
Tax credits: The application of tax credits is the crux of the change to the new system. Tax credits are calculated by the tax office and based on each employee's personal circumstances. Instead of getting a tax-free allowance of £5,500 (€6,983), a single PAYE worker now gets 20 per cent - £1,100 - of that as a personal tax credit.
There is a PAYE tax credit of £400 and various other credits that may be applicable such as mortgage interest relief, age credit, blind credit, rent credit and credits for a dependent relative or incapacitated child.
Working out your tax bill: The first figure you are looking for is your gross tax. Armed with the tax notice, you begin with your gross pay for the pay period. For example, Mr Red is a single, PAYE worker with a gross monthly salary of £2,500. His standard rate cut-off point as listed on the tax notice is £1,644.45 per month. He pays 20 per cent tax on that amount, which is £328.89.
He pays 42 per cent tax on the remaining £855.55 of his gross pay. That amounts to £359.33, which brings him to a gross monthly tax of £688.22.
Mr Red's monthly tax credit, as listed on his tax notice, is £123.34. The final step is to subtract the tax credit from the gross tax to reach the tax payable. In this case, it is £688.22 less £123.34 leaving £564.88 tax due for the month.
Confused?
Take another example. Mrs Pink is married and also earns £2,500 per month. Because her husband does not have an income, her standard rate cut-off point is higher at £2,384.45. She pays tax at 20 per cent on this amount - that's £476.89 - and 42 per cent on the rest of her income, which works out at £48.53. That's a gross monthly tax bill of £525.42.
Mrs Pink qualifies for a monthly tax credit of £213.78. When that is deducted from her gross tax she is left with £311.64 tax payable.
Have you got all your credits? The majority of PAYE workers should have received their income tax notices. The various tax credits each person qualifies for are listed in the tax credits section so it should be easy to see if something is inaccurate or missing. One credit everyone is entitled to is the personal credit, which varies for single, married, widowed and people with dependent children. The tax credit for home loan interest is 20 per cent of the interest payable.
There are some less well-known credits available, including one for service charges. If you have paid your local authority a charge for the "tag" system of refuse collection, you are entitled to maximum tax relief of £150 - that's a £30 credit.
Rent relief for rented accommodation is now worth a £200 annual tax credit, which works out at £148 for the short tax year. There is a comprehensive leaflet that has been sent out with the tax notice and it deals with this question. If the details are wrong, you can either phone your tax office at the number shown on the notice or send a letter to the tax office setting out your claim. The other option is to complete a TFA 1 form, which is also enclosed with the notice, and post it to the Freepost tax office address.
When you contact the tax office, it is important that you give your Personal Public Service number, previously known as Revenue and Social Insurance number, and your Employer's Registered Number. If that's not available, your employer's name and address will do.
