PayLessTax Paylesstax Blog - Page 12 of 14

Partnerships

April 29, 2013

A partnership is a separate legal entity from a sole trader. It requires two or more individuals to carry on business together. You could have a partnership with your spouse, your children if not minors, and any unrelated parties.
Partners are taxed on their share of the profit arising to the partnership. This is calculated in the same way and subject to the same rules as for Sole Traders.
A partnership with your spouse can be useful for tax purposes for saving income tax under the individualization rules and for Capital Gains Tax purposes under the retirement relief rules.

Tax Registration

April 29, 2013

If you are not already in the tax system you will need to register with the Revenue for income tax purposes and perhaps also for Value Added Tax and Employers PAYE/PRSI if you will be taking on employees.

Form TR1, available from www.revenue.ie, deals with the registration for each of these taxes.

Sole Trader

April 29, 2013

When you carry on business in your own name you pay your tax based on the profit made by your business. You must prepare accounts and determine your profit for a twelvemonth period ending in the tax year. Our calculators for the self employed do the calculations for you.

Your taxable profit is the actual profit earned and not what you actually pay yourself from the business. The calculation of your profit will depend on how complicated your business affairs are. This section of our site is primarily intended for small businesses which do not require a complicated accounting structure e.g. self employed commission agents, employees of foreign companies not liable for Irish PAYE, self employed tradesmen, freelance sales people etc.

Self Assessment Tax Rules for Paye Earners & Self Employed

April 29, 2013

There are many PAYE earners who do not realize that they are in fact liable for tax under the Self Assessment Tax System.
The main categories of PAYE earners who are liable to be dealt with under the Self Assessment Tax System are:

Company Directors who own more than 15% of the shares of their company, referred to as proprietary directors for tax purposes. This applies even if their only income is PAYE income.
Employees who exercise share options.
Employees in receipt of nonPAYE income. Where the other income is taxed by reducing your tax credits for PAYE purposes you are not dealt with under the Self Assessment Tax System.

If you are late making tax returns due under the Self Assessment Tax System rules you will be charged interest and penalties. The penalty is 10% of your tax liability for the year. For proprietary directors this 10% penalty is calculated before any credit for PAYE tax already paid. This means your PAYE tax bill is increased by 10% for not making your tax return on time.

When a person retires and is in receipt of both a company pension and the State pension this would bring them under the Self Assessment Tax rules. The State pension is paid without deduction of tax at time of payment. However the recipient will have to pay income tax on the State pension. If they are taxable at the 41% tax rate this could leave them owing a very substantial tax liability to the Revenue. This amount of tax owed could then be increased with the addition of interest and penalties under the Self Assessment Tax Rules.

PAYE earners in receipt of rental income or investment income may also come within the selfassessment rules. The Revenue Commissioners have indicated that they will be paying more attention in future to PAYE earners in receipt of other forms of income.

Social Welfare Benefits

April 29, 2013

In general Social welfare payments (Deasp) are taxable unless they are specifically exempt from tax. These payments are not subject to PRSI or USC.

The following Social Welfare Payments are not liable for tax:

Jobseekers allowance
Farm assist
Supplementary allowance
Disability allowance
Domiciliary Care Allowance
Child Benefit
The Back to Work Allowance
The Back to Work Enterprise Allowance
Back to Education allowance

The following Social Welfare Payments are liable for tax:

Illness benefit ( Child dependent amount is not taxable)
Adoptive benefit
Health & safety benefit
Job seekers benefit
Death Grant
Family Income Supplement
Rural Social Scheme ( RSS)
Community Employment Schemes (CES)
State Pension

The following Social Welfare Payments are taxable and you are obliged to declare same to the Revenue.

Carer’s allowance
Blind Persons Pension
Widow’s Pension
Deserted Wife’s allowance/benefit
Short Term Enterprise allowance

No tax is deducted at point of payment. This can lead to substantial tax underpayments for people. If you have other income e.g. An Occupational Pension, which uses up all of your tax credits then the State Pension is liable for tax in full. Many people are not aware of this and if it is left uncorrected for a number of years a very substantial tax liability can arise.

If you are in receipt of the Old Age Pension you are entitled to the normal PAYE tax credit. This is an important point for people who have been self-employed all their life and never in receipt of PAYE income. When you start drawing the State pension you are entitled to claim the benefit of the PAYE tax credit.

PRSI – Universal Social Charge

April 29, 2013

Employees

Pay Related Social Insurance (PRSI) and the Universal Social Charge ( which replaced the health and Income levies from 2011) are deducted from your gross salary before pension contributions at the same time as PAYE. These charges cover employees for various Social Welfare Benefits, State Old Age Pension and Medical Benefits.

The rate of PRSI payable by employees has been increased to 4% on total income for 2011 onwards. for years up to 2012 the first €127 per week is not liable for PRSI. This relief was abolished for 2013 onwards.

The Universal Social Charge increases as your income gets higher as follows

€0 to €10,036 at 2%
€10,036 to €16,016 at 4%
Over €16,016 at 7%
For the self employed 10% for income over €100,000.

These thresholds are applied on a weekly/monthly basis eg

Salary	Weekly	Monthly
Gross amount	€500	€3,000
First liable at 2%	€193 = €3.86	€836 = €16.72
Next liable at 4%	€115 = €4.60	€498 = €19.93
Balance liable at 7%	€192 =€13.44	€1666 = €116.62
Total USC due	€21.90	€153.27

TAX SAVING TIP

The amount payable for PRSI is substantial and charged on your gross income. For employees in insurable employment which covers the vast majority of employees it is important to check how these charges are applied if you are in receipt of other sources on income such as investment income e.g. rents, deposit interest, dividends etc. This income is not liable for PRSI if you are in insurable employment and do not have selfemployment income. If your tax affairs are dealt with through the self assessment tax system you should check to ensure that you are not being charged PRSI on nonPAYE income.

EXEMPTIONS FROM The Universal Social Charge
The following are the main exemptions from the Universal Social Charge;

Individuals whose income for the year does not exceed €4,004 in 2011 and €10,036 for years 2012 and 2013.
Social Welfare payments and payments in lieu of social welfare
Income already subject to DIRT
Rent a Room Relief Scheme
Child Care Service Relief Scheme
If you are 70 or over or have a medical card the rate you pay will not exceed 4%. Howevre if you have self employemnt income over €100,000 then a rate of 7% is due on the excess over €100,000.

The following is a list of income sources which are exempt from the Income Levy;

Interest on savings certificates
Exemptions from BIK Travel Pass, new bicycle scheme
Distributions to certain nonresidents
Payments in respect of personal injuries
Special trust for permanently incapacitated
Haemophilia Trust compensation payments
Hepatitis C compensation payments
Thalidomide compensation payments
Exemption in respect of certain payment under employment law
Foster Care Payment
Income from Scholarships
Child Benefit Payments
Early Childcare Supplement
Exemption in respect of certain expense payments
Expenses of members of Judiciary
State Employees: Foreign Service Allowance
Employee of certain agencies: foreign service allowances
Bonus or interest paid under instalment savings schemes
Certain interest not to be chargeable
Interest on certain securities
Certain foreign pensions
Basic and increased exemption in respect of lump sum payments on retirement or redundancy
Relief for agreed pay restructuring
Payments in respect of Redundancy
Military & other pensions, gratuities and allowances
Veterans of war of independence
Sceim na bhFoghlaimeoiri Gaeilge

TAX SAVING TIP
To reduce the effect of the Universal social Charge consider the following;

Married Couples transfer income earning assets e.g. property, shares, etc, into joint names which may reduce the impact of the levy.

SelfEmployed divide income between spouses to reduce / avoid the higher rates of the income levy.

The Tax implications of emigrating from or immigrating to Ireland

April 29, 2013

This tax treatment applies to people coming to reside here or emigrating during the tax year.

Dealing first with individuals coming to reside here, they will normally be regarded as residents here for tax purposes from the date of arrival and liable to pay income tax on all income arising from that date on. They get the benefit of a full years tax credits although they may only be resident here for part of the year. This benefit applies provided the person will be tax resident here in the following tax year.

For individuals emigrating during the year the reverse treatment applies. They will be given the benefit of a full years tax credits for the year in which they leave. For individuals taxed under the PAYE system this would generally give rise to a tax refund being due. Their PAYE would have been calculated by dividing their tax credits evenly throughout the tax year. However if they emigrate half way during the year they have a halfyears unused tax credits to claim against their earnings up to the date of leaving. This relief only applies provided the person will be nonresident in the following tax year.

For anyone emigrating as our systems are all online you will be able to use them from wherever you are to complete your tax return and claim your tax refund.

Ceasing Employment – Lump Sum Payments

April 29, 2013

General

There are special tax reliefs available where individuals receive lump sum payments from their employer when they are either being made redundant or retiring. There are certain minimum exemptions, which can then be increased depending on your length of service with the company. The position is further complicated by what happens to your pension rights if you are a member of a company pension plan.
Where a part of your lump sum is taxable then an additional special tax relief may be claimed based on your average rate of tax for the three preceding tax years.

Basic Exemption

First of all statutory redundancy payments are completely exempt from tax. Discretionary payments in excess of statutory redundancy paid by an employer are liable to tax subject to special exemptions for such lump sum payments.

Maximum exemption From the 1st January 2011 the maximum allowable tax free exemption is €200,000. Your tax free exemption will be calculated as per (A), (B) and (C) below. If any of these exceed €200,000 then the maximum exemption is €200,000.

Basic Exemption – €10,160 together with €765 for each complete year of service in respect of which the payment is made is completely tax free.

Increased Basic Exemption – The figure of €10,160 may be increased by an additional €10,000. This extra €10,000 is available where an individual is not a member of a company pension scheme, or irrevocably gives up the right to receive a lump sum from such a scheme and the individual concerned has not received a lump sum payment within the preceding ten years.

Long Service Exemption – Individuals who have a substantial number of years service with their employer may claim a higher level of exemption. This is known as the Standard Capital Superannuation Benefit (SCSB for short). A special formula is used to calculate the relief due as follows:

A x N	L
15

where
A = one years average of the Employees remuneration for the last three years of service.
N = number of complete years service.
L = any taxfree lump sum received or receivable under a company pension plan.

Application of PAYE

Where an Employer is making a lump sum payment to an Employee on retirement or redundancy, they will normally calculate the exemptions referred to above. These exemptions are then deducted from the lump sum payment and any excess is liable for PAYE at your normal tax rate. This can mean that a rate of 41% will be applied to the taxable element of your lump sum. In addition the USC Levy may also be charged on the taxable element of the lump sum.

Top Slicing tax relief for payments received before 1st January 2013

A special claim can then be made to your Tax Inspector for relief from taxation on the taxable element of your lump sum payment. A special tax rate is computed by reference to your average rate of tax over the three preceding tax years. If the application of this average rate of tax gives a lower tax liability than that deducted through the PAYE system you will be entitled to a refund.
Alternatively the taxable element of the lump sum can be treated as normal income for the tax year during which it is received if this gives a lower tax liability than paying tax based on the three year average rate of tax.

Summary

The application of the above rules can be best illustrated by way of example.
The most common decision that has to be made is whether or not to take a lump sum from your pension fund. While these are stated to be free of tax they can in effect be liable for tax. Each individual’s circumstances need to be examined bearing in mind the above rules to see what is best for them. We can provide this service for you at an extra charge.

Ceasing Employment Lump Sum Payments Example

John has worked for 30 years with his current employer but is now being made redundant.
His current salary is €50,000 per annum.
His salary and tax deducted for the three preceding tax years is:

	*Gross*	*Tax*
Year 1	€45,000	€15,000
Year 2	€40,000	€12,000
Year 3	€35,000	€10,000
Total	€120,000
Average	€40,000

He is receiving an exgratia lump sum payment of €50,000 plus his Statutory Redundancy.
He is also receiving a tax free lump sum from the company pension fund of €40,000

Question – What tax will he have to pay on his exgratia lump sum?
Answer – Tax Due €2,000 calculated as follows:
Step 1

Calculate the Basic Exemptions	€10,160 + (30 years x €765)
Total Basic Exemption		€33,110

Step 2 – Calculate Long Service Exemption:

Formula	((A x N)/15) L
Long Service Exemption	((40,000 x 30)/15) 40,000	€40,000

As the figure of €40,000 exceeds the basic exemption this is the figure for the tax free amount.

Step 3 – Calculate tax due on taxable element of lump sum.

Option A use 3 yr average rate

Exgratia Lump Sum Payment	€50,000
Less Long Service Exemption	€40,000
Taxable	€10,000
Average Tax Rate	31%
Tax Due	€3,100

Option B Treat as normal income for year

Normal Income	€30,000
Add Taxable Element of Lump Sum	€10,000
	€40,000
Total Tax Due	€2,510
Applicable to Lump Sum	€2,000

This option gives the lowest tax liability on the lump sum.

*Notes

Initially the €10,000 taxable amount will be taxed at your normal PAYE rate. If this is the 41% rate then the benefit of the lower average rate has to be claimed from the tax office after the end of the tax year. This is only available for payments received before 1st January 2013.
Also note here that if John reduced the lump sum from the pension fund to €30,000 instead of €40,000 he would not pay any tax on the lump sum payment. He immediately saves €2,000 in tax and will have an increased pension because of the lower lump sum payment
The taxable element of a lump sum payment is also liable for the USC Levy which has been ignored in above example.

Employee Expenses

April 29, 2013

The claiming of expenses as a tax deduction against PAYE income is almost impossible. Before an expense will be allowed for tax relief it must have been incurred wholly, exclusively and necessarily in the performance of the duties of employment. This is why there is no tax relief for the costs of travelling to and from work or for normal clothing, cost of lunch etc.

To compensate for this the Revenue has an agreed flat rate expenses allowance for certain categories of employment which is automatically allowed to you. There is no need to produce receipts etc in support of your claim. There is a full listing of the agreed amounts on the tax return section of our website. If you are employed in one of the qualifying categories you should check to ensure that the appropriate allowance is being given to you. This is something that is often overlooked and can lead to sizable tax refunds being due.

e-Working and home workers

Where an employee works at home on a full or part-time basis they can receive an extra payment of €3.20 per day without deducting PAYE,USC or PRSI.

This payment is to cover expenses such as heating and electricity costs.

e-Working involves:

working for substantial periods outside the normal place of work
logging onto a work computer remotely or sending and receiving email, data or files remotely

Ceasing Work

April 29, 2013

If you give up work or are unemployed for a period of time you may be entitled to a tax refund for the particular tax year involved. This will depend on what other earnings you may have after ceasing work, e.g. social welfare benefits. You do not have to wait until after the end of the tax year to claim a refund. This can be done on an ongoing basis during the tax year by contacting your tax office.

People who work on a temporary basis e.g. students doing summer work may be entitled to a tax refund after they cease work. This refund can be claimed through your tax office. You will require a form P45 which your employer should have given to you when you ceased work. You send this to your tax office and they will deal with your refund claim.

« First ‹ Previous 10 111213 14 Next ›Last »