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APPENDIX IIIGLOSSARY OF TERMSGLOSSARY OF TERMSTax CreditEach individual is entitled to certain tax credits depending on their personal circumstances — see list of Tax Credits and their 2007 values at Appendix A. The value of the Tax Credit represents the actual amount by which a person’s tax liability is reduced, e.g. the Home Carers Tax Credit of €770 p.a. (2007 value) reduces a person’s tax liability by this amount. The total value of the Tax Credits to which an individual is entitled is subtracted from that individual’s gross tax figure each pay period to produce the net tax payable in that period — see example at Appendix B. Tax credits are amounts which, generally speaking, are only changed through the annual Budget changes. Once claimed, they will be carried forward from year to year unless there is a change in the claimant’s personal circumstances. Tax AllowanceTax allowances also have the effect of reducing a person’s tax liability. In the case of these allowances, however, the actual amount by which a person’s tax liability will be reduced involves a calculation. This calculation involves applying the rate of tax at which the relief is allowable to the amount of expenditure incurred on the item in question or to the designated amount of the allowance. Relief in relation to some allowances is restricted to the 20% tax rate - these are known as ‘Standard Rated Allowances’. In relation to other allowances, relief is allowed at the highest rate at which the individual pays tax, either 20% or 41% - these are known as ‘Marginal Rated Allowances’. For the list of Standard Rated and Marginal Rated Allowances please see Appendix A. We take the Guide Dog Allowance which has a value of €825 as an example. This allowance will reduce the tax liability of an individual paying tax at the Standard Rate by €165 p.a. (€825 x 20%) and by €338.25 p.a. for an individual paying tax at the highest rate (€825 x 41%). Some tax allowances are designated amounts which generally only change in the Budget, e.g. Rent Relief, Guide Dog Allowance. Other tax allowances, however, relate to expenditure which a person incurs throughout the tax year, e.g. health expenses. Because the amount on which relief is claimed is not known until the end of the tax year claims in these circumstances are made retrospectively and will involve a review of the tax liability for the tax year in which the expenditure was incurred - for instance health expenses which were incurred in 2006 will be claimed at the end of 2006. Tax Credit CertificateA Tax Credit Certificate is a notification, issued by Revenue, to every employee who makes a claim for tax credits, setting out in detail the amount of tax credits and standard rate cut-off point that Revenue has determined to be due to the employee. In addition to issuing an employee certificate to each employee, Revenue also issues an employer copy Tax Credit Certificate (P2C) to the employer. It shows only the total amount of the tax credits and standard rate cut-off point to which the employee is entitled together with the equivalent weekly and monthly figures. It also shows the employee’s previous pay and tax from 1 January, if applicable. PAYE Balancing StatementA PAYE Balancing Statement (Form P21) is a statement issued by Revenue, which shows the employee’s total income, tax credits, PAYE tax paid, and final tax liability for a particular tax year. It shows whether the individual has overpaid or underpaid tax for the year. Where an overpayment occurs, e.g. in the case of an individual claiming health expenses relief, a cheque for the amount overpaid will be issued by Revenue. Where the person has an underpayment, the method of collection will be outlined on the Balancing Statement. Flat Rate ExpensesFlat Rate Expenses are expenses that are incurred in the performance of the duties of the employment and are directly related to the ‘nature of the employee’s employment’. A standard flat rate expenses allowance is set for various classes of employee. For example, bar trade employees are granted flat rate expenses of €93 per annum. The amount of the deduction is agreed between Revenue and representatives of groups or classes of employees (usually the employees are represented by trade union officials). The agreed deduction is then applied to all employees of the class or group in question. Standard Rate of TaxThe Standard Rate of Tax is the lower of the two tax rates (2007: 20%). Higher Rate of TaxThe Higher Rate of Tax is the higher of the two tax rates (2007: 41%). Standard Rate Cut-Off PointThe Standard Rate Cut-Off Point is the maximum amount of income which is subject to the 20% rate of tax. The amount of income in question depends on a person’s individual circumstances as illustrated in the following table:
All income above the Standard Rate Cut-Off Point amounts indicated above is subject to the 41% rate of tax. *The increase in the standard rate tax band (20%) is restricted to the lower of €25,000 or the amount of the income of the spouse with the lower income. The increase is not transferable between spouses. Marginal RateThe term Marginal Rate of Tax refers to the highest rate of tax that is applied to an individual’s income in a given year. The Marginal Rate of Tax can be either the Standard Rate of Tax or the Higher Rate of Tax depending on whether the individual’s income exceeds the Standard Rate Cut-Off Point. Tax Relief at Source (TRS)Tax Relief at Source is the means by which an individual obtains tax relief directly from the ‘source’ institution (e.g. lending agency, health insurance provider) rather than claiming the relief directly from Revenue. The agency or provider in turn recoups the relief from Revenue. Mortgage Interest TRSTax relief for home mortgage interest is given at source. The tax relief is given by the lender, either in the form of a reduced mortgage payment or a credit to the individual’s funding account. It is not necessary to claim mortgage interest relief directly from Revenue and it no longer appears on Tax Credit Certificates. Maximum TRS:
Medical Insurance TRSTax relief for medical insurance premiums paid to an authorised insurer is granted at source. Subscribers will pay a reduced premium (80% of the gross amount) to the authorised medical insurer. This reduction is the same as giving tax relief at the standard rate of tax (20%). An employee whose medical insurance premiums are paid on his/her (or his/her dependents) behalf by his/her employer will not have been allowed Tax Relief at Source and can claim the tax relief directly from Revenue. Benefits-in-Kind (BIKs)BIKs are non-cash benefits received by employees from their employers. Most BIKs (e.g. the private use of a company car, free or subsidised accommodation, preferential loans, vouchers in various forms, the payment of club subscriptions and medical insurance premiums paid on an employee’s behalf, etc) received from an employer, are taxable. For PAYE/PRSI purposes a cash value of the BIK must be added to the employees pay and the total amount is then subject to tax and PRSI in the normal way. PAYE On-LinePAYE On-Line is the new secure self-service internet facility which Revenue has provided for PAYE taxpayers to enable them to do most of their PAYE business on-line. ROSThe Revenue Online Service (ROS) is the secure internet facility which Revenue provides to both its Business and PAYE customers to enable them to deal with the organisation through electronic means. Appendix AList of Credits /Allowances / Reliefs
Standard Rated Allowances / Reliefs (2007: 20%)
Marginal Rated Allowances / Reliefs (Allowable at the individual’s highest rate of tax — 20% or 41%)
Appendix BHow does the PAYE Tax Credit System work?The following describes how an individual’s weekly tax figure is calculated - (if the employee is paid fortnightly or monthly the same principles will apply) - 1.Tax is calculated at the standard rate of 20% on gross pay up to the amount of the individual’s weekly standard rate cut-off point 2.Any balance of gross pay above the standard rate cut-off point is taxed at the higher tax rate of 41% 3.The tax calculated at 20% is added to the tax calculated at 41% to arrive at the gross tax figure 4.The gross tax figure is then reduced by the amount of the individual’s tax credits to arrive at the tax payable in that week. IllustrationMarried person
A Tax Credit Certificate showing these tax credits and standard rate cut-off point issues to employee and employer/pension provider. _____________________________________________________________________ Married person earning €44,200 per annum
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