How to Save €5360 in income tax

How to Save €5360 in income tax

Reducing your tax liability using Standard Rate Cut off Point

Figures used are the 2016 ones.

In Ireland you pay tax at the lower rate of income tax (currently 20%) up to point you exceed your standard rate cut off point after this you pay the higher rate.

Examples

(1)    Single Person their first €33800 of income is taxed at 20% and the balance (anything from €33801 and above) is taxed at 40%.

(2)    Single parent the first €37800 is taxed at lower rate then rest at 40%

(3)    Married couple one income the first €42800 is taxed at 20% then balance at higher 40%

(4)    Married Person two incomes the €42800 is increased by a max of the lower income or €24800. So the maximum at lower rate is €65600 (€37800*2)

Implications and Tax planning to maximise the amount of Income taxed at 20%

(1)    If you are a PAYE worker then there isn’t a whole lot you can do in relation to tax cut off points because you generally can’t split your wages between yourself and our spouse.

(2)    If you are a PAYE worker with the joyous position of having your choice of jobs at different wages rates then the ideal situation to minimise tax is to have one income at €42800 or less and the other at whatever adds up to a balance of €65600. So wife on €40000 then husband on €25600. This allows for all your tax to be at 20%.

(3)     If you are self-employed and earn more than €42800 per year then there are two scenarios

a.       Your spouse works. If he/she is on less than €24800 then you should set up a partnership or employ her in your company and bring her/his income up to €24800 and therefore reduce your taxable income by the same amount.

b.      Your spouse doesn’t work and has no other source of income then you should have him/her as a business partner or company employee. Then split the profits so at least one earns €24800 and the other earns the balance (or indeed any split as long as one is above €24800).

(4)    The Maximum benefit from 3b is for someone earning €65600 or more. If the €65600 is all in one spouses hands then the tax is €42800x20%+€24800x40%= €18480 (less their tax credits). If the income is spread then the full €65600 is taxed at 20% so €65600*.2=€13120. This equates to a saving of €5360 (€18480-€13120). There are also saving in Universal Service Charge which I will analysis in a different article. However there is one bite in the tail in that you lose the Home Carers allowance of €1000 (but still well worth it). It also may not be suitable for some people in certain circumstances such as those on social welfare.

The above is for general information purposes. Each individual case is different and you should get advice from your accountant on all tax planning issues.

© Frank McGivney & Co Ltd (046)9293891  Date written: 22.04.16