Paying tax/deductions on salary arrears

oct31baby

Just found out that I have been underpaid for the last 4 years at a gross amount of 15,000...happy days...until I was told I will end up paying about 65% in taxes and deductions on all of that!!! Is this right?? Its huge!
I would appreciate any advice here!

Alan Shore

Where is the 65% coming from? Income tax 41% PRSI 4% USC 7% = 52%.

If you are a lower rate tax payer there is an argue ment that the extra income should be taxed in the year it was earned rather than the current year.

barneystinson

There's case law in relation to this (I'll try and find a link).

The position is that the employer has to operate payroll deductions under the PAYE regulations but the employee, who is the taxpayer at the end of the day (the employer is acting as an agent for the exchequer in deducting and paying over the taxes) can seek to have their balancing statements fixed to have the income taxed in the years it relates to, which could trigger a repayment.

As Alan says though, this may not make a material difference unless splitting it over the 4 years actually would mean some of it being taxed at a lower rate in the earlier years.

oct31baby

thanks for that.
the 65% is made up of tax at 41, PRSI, USC, pension related deductions 10.5% and two other obligatory pension things (I'm teacher)

I just think that surely, if I was being paid the correct amount all along, I wouldnt have been paying so much!

barneystinson

McKeown v Roe (1928) is the case I was thinking of:

The President (Sullivan) towards the end of his judgment said this:
“The argument on behalf of Mr. Roe is that, as the ￡422 was not received by him during the year 1924–25, it cannot be taken into account in the assessment for that year. I do not take that view. The effect of Rule 5 is that where a person subsequent to the year of assessment becomes entitled to additions to his salary for that year, these additions are to be taken into account as part of the salary for the year of assessment, ‘so that he may be charged in respect of the full amount of his salary, fees, or emoluments for that year’. This seems to me to afford a clear indication that in taxing the profits of an office under Schedule E, such profits are not confined to the amount actually received in the year of assessment, but include fees or emoluments which were earned by the holder of the office during that year, and subsequently paid.”

O’Bryne, J., said:
“All the rules point to the conclusion that, where a person holds an office, the amount which he earns during any particular year of assessment is the amount on which he is liable to be assessed for the tax for that year.”

Cushie Butterfield

Firstly, to avoid any bad news you should use an online tax calculator to make sure you haven't underpaid tax as the situation stands in any of the previous years.

You can claim a refund of overpaid tax for the last four years

You'll have to get a breakdown of arrears due pertaining to each separate year from your employer.

With this breakdown you can then make a request to Revenue to review the previous years using the gross pay as it should have been for each year, which should result in underpayments of tax for those four years, but an overpayment for this tax year. The overpayment can be then set off against the underpayments, which ideally would result in a refund. You may have to wait for the end of this tax year to do this, so it would be best to contact Revenue to confirm the correct procedure.

Have a quick read through this pdf document from revenue.ie , scroll down to Section 6 Example B, which gives an example for current employees, & also Section 7.

http://www.revenue.ie/en/about/foi/s16/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-24b.pdf?download=true

nompere

As others have pointed out, the income is liable to be assessed in the years in which it was earned. It is also the case that the employer must operate PAYE etc at current rates at the time of payment. So it is up to the taxpayer to seek assessments for all years to put the income into the proper places, and to get appropriate refunds.

dbran

Hi

Would also add that this rule does not apply to USC which is deducted when paid and cannot be brought back to the year the income was earned.

dbran

Marcusm

nompere wrote: »

As others have pointed out, the income is liable to be assessed in the years in which it was earned. It is also the case that the employer must operate PAYE etc at current rates at the time of payment. So it is up to the taxpayer to seek assessments for all years to put the income into the proper places, and to get appropriate refunds.

I would put it slightly differently; the income is assessable for the year in respect of which it is payable not earned. In this case the year years will be the same but for other circumstances (e.g. bonuses earned for a particular year but with deferred payment) might give a different result. The basic rule in Sch E is fairly clear and I don't that the 1928 case law remains applicable (as the statute is different partly to take account of the introduction of PAYE iate 1960s).

As noted, the position for USC and PRSI will be different. Also the PAYE position will be different as the PAYE is determined when actually paid rather than the period for which is is assessable - this would be the same but for the screw up. This may mean that more tax is now deducted than is actually due or vice versa. However, the OP should be indemnified for the costs of this.

OP: You should be entitled to be put in the same position by your employer as if the income had been paid when properly due. This should extend also to interest (on a post tax indemnity basis) plus accrual of pension rights as if they had not erred.