When you look at your payslip, you’ll see a list of deductions taken from your gross pay, one of which is PAYE (pay as you earn) tax. It is the system used by the Government of Ireland to charge income tax, PRSI and Universal Social Charge (USC), with the figures based on your income. PAYE is deducted from your gross pay and redirected to Revenue, who collect taxes on behalf of the Government. The amount of PAYE for which you are liable will depend on your income and your personal circumstances.
Even for people who have been in full-time employment for several years, the specifics of PAYE can be difficult to comprehend. Most people are aware that they can claim tax back through the PAYE system but might not know the process for claiming it back, nor the amount to which they are entitled. Our guide to PAYE tax returns aims to clarify some of the grey areas for you.
How does PAYE work?
An employer is obliged to make PAYE deductions from their employee’s payslips and report these deductions to Revenue on or before the due date for payment. Employers must operate PAYE when employees’ earning surpass a specified amount, although the classification of someone as an ‘employee’ must also be ascertained.
In the case of a person who is contracted on a one-off basis to complete a specific task (e.g. builders renovating an office), they are considered a contractor and not an employee, as they are only providing a contract for service. A contract of service refers to an employment contract where there is a long-term relationship between the employer and employee, who has been hired to work for that company rather than providing a one-off service.
If the person is providing a contract for service and is deemed to be working “as a person in business on their own account”, they could be classified as a free agent with economic independence from an employer, so PAYE rules do not apply in this instance.
Understanding tax credits
At the start of each tax year, Revenue will send you a notice of determination of tax credits and standard rate cut-off point, with tax credits specifying the reduction in tax for which you’re liable. Your employer will also receive this notice so that they can ascertain the correct amount of tax to be deducted. The certificate will be revised in line with changes in personal circumstances (e.g. change of job and/or salary).
PAYE tax rates: How is PAYE calculated?
The PAYE tax rate for which you’re liable is determined by your income and circumstances. The first part of your income, up to a specified amount (see below), is charged at 20%. This is known as the standard rate of tax. Any income in excess of this amount is charged at a rate of 40%.
The yearly standard rate cut-off points for 2019 are:
• €35,300 for a single person
• €39,300 for a one-parent family
• €44,300 for a married couple (or civil partners) with one income
• Up to €70,600 for a married couple (or civil partners) with two incomes
For a married couple or civil partners with two incomes, the increase is determined by the amount of the second income. The increase will either be €26,300 (the difference in cut-off points between a one-income and two-income married couple or civil partnership) or the amount of the person with the smaller income, whichever is the lower amount.
For example, if the person with the smaller income earns €25,700 per annum, the standard rate cut-off point will be €70,000 (44,300 + 25,700). However, if the person with the smaller income earns €27,000 per annum, the increase is capped at €26,300 so that the standard rate cut-off point is €70,600.
The increase in the standard rate cut-off point is not transferrable between spouses. Even if one person in a marriage earned €45,000 per annum and the other earned €20,000, the former will still be taxed at 20% on the first €44,300 and 40% on the remaining €700; they cannot move that discrepancy to the lower-earning person in order to avoid the higher PAYE rate.
PAYE modernisation explained
As of the end of 2018, you no longer receive a P60 from your employer. From the beginning of 2019, an End of Year Statement is available upon signing into your account on the Revenue website. The statement includes details of all your pay and deductions for all employments during the tax year. If you are unable to use the Revenue website for any reason, you can request a hard copy of your End of Year Statement.
This introduction of PAYE modernisation obliges employers to report their employees’ pay and deductions in real-time, which will make it easier for the correct pay and deductions (e.g. income tax, PRSI). This came into effect from 1 January 2019, with employers obliged from that date to have all necessary policies and procedures in place. PAYE modernisation intends to streamline business processes and reduce the volume of administration that would previously have been required of employers in fulfilling their PAYE reporting obligations. If an employee was leaving their job, for instance, employers would no longer fill out a P45 as this is incorporated into the PAYE modernisation process.
For employees, PAYE modernisation also simplifies mattes. If you are an employee, you can now view what has been submitted by your employer regarding tax deductions just by signing into your Revenue account. You will then be able to allocate your credits and cut-offs between multiple employments if you change jobs during the calendar year. When the year has finished, you will be able to view and print an official certificate showing your earnings and deductions. With PAYE modernisation, it is likely that overpayments and underpayments of taxes will become a thing of the past.