Damn Tax credits MEssing with my head, help

Guy:Incognito

Right back in the days of the simpl etax free allowance everything was easy peasy. So i have a quick question. Due to my job being stupid i got paid part of my wages cash in had this week (ssh, dont tell the government) anyway I was left haveing to get €290 by cheque, minus tax and PRSI of course. Now me being your average single person, how much sould I have lost in tax etc.?

seamus

There's absolutely no difference between tax credits and a tax-free allowance. It's the same way of saying the same thing.

To convert, take your tax credits. Multiply by 5. That's your TFA (this only works while the lower band of tax is 20% though).

Tax credits were obviously dreamed up by someone who thought that they would give the appearance of getting something back. At the start of the year, you'd have received a statement of tax credits from the tax office, with your weekly tax credits on it. What you do is:
Take your gross pay and multiply it by 20%. This is your gross tax payable. Take your tax credits from your gross tax payable and you're left with your net tax payable. Take this from your gross pay, and you're left with your pay before PRSI.

Now. PRSI....an even bigger mess.
Take a look at this:
http://www.welfare.ie/publications/sw14.html#classa
PRSI varies depending on what you do, and how much you earn per week. I'll assume you're in class A (most people are) and you earned more than €356 (gross) last week.
This means that you pay 2% on your first €127 (€2.54) and 6% on your balance (of gross).

Make sure you calculate the PRSI from your gross pay, not your pay after PAYE (:)). Take the PRSI and PAYE away, and hey presto! Your net income.

De Rebel

Originally posted by seamus
There's absolutely no difference between tax credits and a tax-free allowance. It's the same way of saying the same thing.

Not quite true. Both systems can be used to achieve the same result, but there is a significant difference between them. By default, Tax Credits apply benefit at the standard rate (20%) Tax Free Allowances apply benefit at marginal rate (which may be 42%).

So, in simple terms, and excluding special situations, a Tax Credit for a specific amount (say €1,000) will have the same value for every recipient irrespective of their marginal rate (every taxpayer gets their tax bill reduced reduced by €1,000), while a Tax Free Allowance for a specific amount (say €1,000) will have over twice as much value to someone with a marginal rate of 42% (tax bill reduced reduced by €420) whereas its value to a standard rate taxpayer (20%) will be the reduction of her/his tax bill by €200.

seamus

Originally posted by De Rebel
Not quite true. Both systems can be used to achieve the same result, but there is a significant difference between them. By default, Tax Credits apply benefit at the standard rate (20%) Tax Free Allowances apply benefit at marginal rate (which may be 42%).

So, in simple terms, and excluding special situations, a Tax Credit for a specific amount (say €1,000) will have the same value for every recipient irrespective of their marginal rate (every taxpayer gets their tax bill reduced reduced by €1,000), while a Tax Free Allowance for a specific amount (say €1,000) will have over twice as much value to someone with a marginal rate of 42% (tax bill reduced reduced by €420) whereas its value to a standard rate taxpayer (20%) will be the reduction of her/his tax bill by €200.

*whoooosh* (Over my head)

I assumed that the TFA worked the same way. You had say a TFA of €10,000. This was untaxed. The money from €10,000 to the lower band-cut-off-point is charged at the lower rate, and the balance is charged at the higher rate. No?
That is, the TFA/tax credits will never overflow into the higher tax band anyway, so all TFA/TAx credits are essentially offset against your lower rate tax, and then your higher rate tax is deducted?

De Rebel

Originally posted by seamus
*whoooosh* (Over my head)

I assumed that the TFA worked the same way. You had say a TFA of €10,000. This was untaxed. The money from €10,000 to the lower band-cut-off-point is charged at the lower rate, and the balance is charged at the higher rate. No?
That is, the TFA/tax credits will never overflow into the higher tax band anyway, so all TFA/TAx credits are essentially offset against your lower rate tax, and then your higher rate tax is deducted?

Thats not the way it works. effectively, TFA works from the top down (effectively it always operates at the higher band)...... Lets work the example a few times,

Example A If you have TFA of €0, and earnings of €50,000, and the 20% band is say €26,000, then

Earnings €50,000
TFA €0 (amount taxable at zero)
Taxable at 20% €26,000
Taxable at 42% €24,000
Tax liability €15,280

Example B If you have TFA of €10,000, and earnings of €50,000, and the 20% band is say 26,000, then

Earnings €50,000
TFA €10,000 (amount taxable at zero)
Taxable at 20% €26,000
Taxable at 42% €14,000
Tax liability €11,080

The difference in the tax paid is €4,200, showing that the effect of a TFA of €10,000 is to reduce the tax liability at the marginal (42%) rate.

Now take the same examples with a Tax Credit of €10,000

Example C If you have TC of €0, and earnings of €50,000, and the 20% band is say €26,000, then

Earnings €50,000
Taxable at 20% €26,000
Taxable at 42% €24,000
TC €0
Tax liability €15,280

Example D If you have TC of €10,000, and earnings of €50,000, and the 20% band is say 26,000, then

Earnings €50,000
Taxable at 20% €26,000
Taxable at 42% €24,000
Tax computed €15,280
TC €10,000
Tax liability € 5,280


The difference in the tax paid is €10,000, showing that the effect of a TC of €10,000 is to reduce the tax liability by that amount.

This shows that Tax Credits are a fundamentally different thing to Tax free allowance. But it does not tell the full story. The real reason for moving to tax credits was because TFA benefits high earners disproportionately. A tax free allowance of €10,000 is worth €4,200 to a high earner, whereas its worth only €2,000 to a standard rate tax payer. A tax credit of €10,000 is worth €10,000 to both.


I'm not sure that I am clarifying things too well......

Anyway this is off topic and not addressing the original poster's question.......................

seamus

Ah, yes, very good I understand now.

Victor

De Rebel you are in a way correct. However, many tax free allowance when converted to tax credits were increased to make sure that those on the higher rate weren't disadvantaged.

De Rebel

Originally posted by Victor
However, many tax free allowance when converted to tax credits were increased to make sure that those on the higher rate weren't disadvantaged.

For example?

I'm not disputng that a tax free allowance can be converted to a tax credit. But te reverse of what you are saying is actually the case. Most tax free allowances were standard rated prior to the introduction of tax credits. Were there any that were increased in the way you suggest?

AFAIK, the only marginal rate relief now is (a) in respect of pension contributions, and those are handled before tax computations and therefore don't figure as tax credits (b) medical expenses which are claimed retrospectively on a prior year basis and and therefore don't figure as tax credits

Victor

Originally posted by De Rebel
Most tax free allowances were standard rated prior to the introduction of tax credits.

Quite a few things like AFAIK mortgage interest relief, were doubled when then were standard rated.

De Rebel

Originally posted by Victor
Quite a few things like AFAIK mortgage interest relief, were doubled when then were standard rated.

mortgage interest relief is not operated as a tax credit, it works under TRS (Tax Relief at Source)

shoegirl

Originally posted by seamus
Tax credits were obviously dreamed up by someone who thought that they would give the appearance of getting something back.

You are more correct than you might think. The whole point of introducing a tax credit system is that in the event of "giving back" to (for example) low paid workers who would otherwise lose out in the event of a tax cut, the cut would become a credit, so they could actually give something back. The system is designed so this can be done in the future.

There is such a facility in the UK where very low paid workers are credited back taxes to bring their incomes up to £152 or better a week.

I can understand why you are so confused, it took me 3 years to understand.

Basically you work out the income tax payable on your entire income and then deduct the tax credit off that. Its actually simple for certain kinds of tax allowances and since most tax allowances are now only available at the 20% rate, more equitable.