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 

Universal Service Charge

 My Views on the Universal Service Charge (USC) and how it is acting as a disincentive to investment in Ireland
By Frank McGivney

This is a simplified analysis and doesn’t take into account more complex tax issues but does apply to most small and medium size businesses and Paye workers.
The government of Ireland imposed a further tax on the Irish people in 2011. It’s called the universal service charge (USC for short). Never has a name been more appropriate for a tax because it is applied in a way that is universal to peoples income and it even is based on income that people never even receive. This tax is charged on your income in a given year at the following rates generally
The first Euro 10036 is taxed at 2%
The next Euro 5980 is taxed at 4 %
Then the balance is taxed at 7% i.e. anything above Euro 16016.
This is of course on top of your income tax and Prsi payments. Now with income tax if you are self employed you are taxed after you take away any losses you may have had in previous years and also after you have taken away your pension contributions and after you take away capital allowances (which are the allowances for the purchase of fixed assets such as heavy machinery, motor vehicles etc. which you are allowed at 12.5% per year). However USC is calculated before you deduct these items. This means that you are paying a tax on your absolute total income for a year with out taking into account any pension contributions or more importantly without allowing you to write of losses forward or capital allowances.
In order to set up a business you need usually to invest in machinery or vehicles at the beginning in order to get it up and running. This often times involves buying machinery or motor vehicles etc so that you can actually carry out the business. Then these are allowed against your income tax, however they are not allowed generally for USC purposes. In other words you may spend a large amount on starting the business up in order to make a living for yourself and to give employment and you are in effect taxed on this investment.
In the first few years of business it is common to make a loss and of course you can make a loss at any stage of running a business. It is standard good practice in most countries with a proper tax system that you are allowed to write of these losses in future years to reduce your tax liability. This is a very important aspect of the tax code as it allows a business to get over loss making years and continue to provide employment and to hopefully be a success. However USC circumvents this by being calculated before losses are deducted. Once again this is a disincentive to investment and entrepreneurship as any self employed person or company needs to be able to recover from its losses by having tax relief.
Paye workers probably do not even realize that USC is calculated on their income before pension contributions. A lot of people who make pension contribution have no option but to pay them for example anyone in the civil service. In effect what is happening is that their pension contributions are reducing their net pay by 7% of the contribution if they are already earning over Euro16016. So they are coming out with less money in their pay packet based on income that they can never have received. I know the pension contributions will benefit them in the long term. However I believe that up to a certain level pension contributions should be tax free. The reason been is that the way the government is running the country we are most likely going to be bankrupt in the future. This is because there is no way we will be able to pay back the current debt burden that they are imposing on us, in order to repay the bank debts. If this happens we will be either poverty stricken or subservient to the powers in Europe and people can forget about getting old age pensions. So it’s vital that we put money aside for our own future incomes. This should in my opinion be limited to exclude relief for massive pension contributions for the wealthy.
In my opinion this is a completely unfair tax but it is the tax that the government will increase in the budget, as a 1% increase in USC will have a much greater tax take effect than an increase in any other tax. I have no problem with a high tax regime. In fact I think that in order to stimulate growth that governments should be elected that alternates between high and low tax regimes. This is a reflection of the inertia of the human condition. In order to stimulate an economy it has to be hit with different tax and economic policies over time. This would in my opinion help to prevent the swing from depression to recession. However a basic requirement of a high tax regime been successful is that the tax take is then used by the government to increase their capital and current expenditure. This way the tax taken is kept in the domestic economy and stimulates growth. However the huge mistake been made at the moment is that the tax is in fact been taken out of the economy to repay bank debts to foreign bond holders. This is just draining the economy. I would in fact accuse the current government of implementing the very same policies as the government did in the boom except in reverse. So in the boom the government drove a boom higher and now in a recession the current one is making the same mistake in reverse by driving us further in to recession. However that’s an argument for another article.
Frank McGivney is a practicing Chartered Management Accountant in Kells Co. Meath, Ireland and can be contacted at fmcgivney@live.com .














Computers for business

Fundamentals of the Irish Vat System

Fundamentals of the Irish Vat System by Frank McGivney & Co. Chartered Management Accountants contact fmcgivney@live.com Vat stands for Value Added Tax and is a tax on the supply of goods and services. Its basic structure is such that the person who pays for the vat element of any product or service is the final consumer and the person who collects the tax and sends it to the Revenue Commissioners is the business that provides the good or service. As a product is sold through the chain of distribution up to the final consumer each of the businesses in the chain can in turn claim the vat element that they have paid for the product or service from the tax man. So if a manufacturer sells a chair to a distributor the manufacturer charges vat and the distributor then claims this vat back from the Revenue Commissioners. The distributor then sells the chair on to a retailer and charges the retailer vat on the sale and the retailer claims this vat back. When the chair is sold to a private consumer the retailer charges the consumer vat on the sale and the consumer can’t claim this back and the retailer must pay the vat to the tax man. So up until the final consumer the vat position for the tax man is nil. The manufacturer charges vat to the distributor and then pays this vat to the revenue commissioners. The distributor however claims this vat back and so as the Revenue

Commissioners receive the vat in it also pays it back out again. In the construction industry a major financial anomaly arose because the main principal contractors who paid subcontractors claimed the vat that they were charged immediately however in some cases the subcontractor who charged the vat didn’t submit and pay the corresponding vat until much later, or may not have paid it at all. Therefore the revenue commissioners were at a huge loss. As a result a Reverse charge system was put in to place as and from 01 September 2009 which meant that the subcontractors no longer accounted for vat at all but instead the principal contractor accounted for both sides of the transaction in his vat return thus the net effect to the Revenue Commissioners is nil. In practice how vat works is that a business registered for vat calculates how much vat it has charged on its sales for a certain period. It then calculates how much vat it has been paid on its purchases for the same period. If the vat on sales is more than the vat on purchases then the business owes the difference to the tax man and must pay it in a timely fashion or face interest and collection charges. If the vat on purchases is greater than the vat on sales then the business is owed vat from the tax man and will claim this back in its periodical vat return. Such refunds in Ireland can be offset against other outstanding tax liabilities or can be refunded to the business’s bank account if all its tax affairs are up to date. In Ireland the periods for vat returns are every two months or four months or six months depending on the size of the annual vat liability of a business. At the end of each year a business must also submit a trading return showing the net values for vatable sales and purchases during the preceding year i.e. this is the amount of total invoices before vat is charged. Subject to approval by the revenue commissioners a business may also set up a monthly direct debit for vat based on an estimated annual vat liability. The business then just puts in one annual vat return and pays or reclaims the difference between the total yearly direct debits and the actual return. A further article will look in more depth at the actual procedures and processes of accounting for Vat in Ireland. The turnover thresholds for registering for vat in Ireland are as follows: • a) €37,500 in the case of persons supplying services, • (b) €37,500 for persons supplying goods liable at the 13.5% or 23% rates which they have manufactured or produced from zero rated materials, • (c) €37,500 for persons making mail-order or distance sales into the State, • (d) €41,000 for persons making intra-Community acquisitions, • (e) €75,000 for persons supplying goods, • (f) €75,000 for persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods (other than of the kind referred to at (b) above) and • (g) A non-established person supplying taxable goods or services in the State is obliged to register and account for VAT irrespective of the level of turnover.
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Tax Tip 18.02.13 Bus and Bikes to reduce tax for paye workers

One of the ways to reduce the amount of tax that you pay as a PAYE employee is to get your employer to give you a bus or train pass or to buy you a bike in lieu of income you are already receiving. Both of these are exempt from benefit in kind and therefore wlll not incur tax implications and if they are used to replace some of your existing salary then they will reduce your tax bill.
If you approach your employer and ask him can he pay you 500 euro (just an example) less a year through your wages and instead buy you 500 euro of bus passes or train passes then you will end up paying less tax. This is because the 500 bus pass is exempt from tax where as you would be paying tax on the 500 if just paid through your normal wages. See Schedule (1) below for who your employer can get the passes from in order to be eligible for the exemption. Your employer can then claim the cost of the pass as an expense and also saves money on the prsi relating to the amount which would have been paid as wages.
The government have implemented this exemption to encourage people to use public transport.
Potential Pitfalls: Your employer has to pay for the pass, you cant buy it and then pass the bill on to them.

You can also get your employer to buy you a bike and safety equipment up to 1000euro per year and this is also exempt. This is a really good scheme.
Of course these are only of benefit if you want to use public transport or ride a bike to work. But if you are on the high rate of tax and you get 1000 euros worth of income from bus passes then you are saving your self at least 410euro in tax



Schedule (1)
 The bus or train pass must be issued by either:
•
CIE or any of its subsidiaries (e.g. Bus Eireann, Iarnrod Eireann, Bus Atha Cliath); or
•
A private bus operator holding a passenger licence under Section 7 of the Road Transport Act 1932; or
•
A person who provides a passenger transport service under an arrangement entered into by CIE in accordance with Section 13(1) of the Transport Act 1950.
•
A person who has entered into an arrangement with the Railway Procurement Agency, in accordance with section 43(6) of the Transport (Railway Infrastructure) Act 2001 to operate a light railway or metro
•
A person who provides a ferry service within the state, operating a vessel which holds a current valid –
(i)
passenger ship safety certificate,
(ii)
passenger boat licence, or
(iii)
high-speed craft safety certificate,
issued by the Minister for Communications, Marine and Natural Resources.

If you have any queries contact Frank McGivney & Co. Ltd Chartered Management accountants, fmcgivney@live.com 0469293891