"Taxable Earnings" higher than "Total Pay"

Generic Dreadhead

So on my payslip, my Total Pay is (let's say) 2,000... But my Taxable Earnings is 2,200.... Why is this?

If it makes any odds I have a Pension (which I contribute towards), and Free Health Insurance.

Some mentioned to me that these are considered some sort of benefit-in-kind so they are considered taxable but I don't really understand that.

I've googled it and can't find any usefull info.

It would be great if someone could help me out here in plain english.
What's funny is I'm normally good at taxes, credits etc and help others in the office with it... But this I just cannot grasp

Thanks in advance

srsly78

"Benefit in kind" is a phrase you will learn to curse. It means that you have to pay tax on all those nice shiny benefits. This means that the nice shiny benefits are not really benefits at all in most cases. It works out the same as if you just paid for the benefit out of your own pocket (the group health scheme might get slightly better value tho is one tiny advantage).

The simple explanation: If the company gives you e1000 worth of health insurance, this is the same as if they gave you e1000 of cash. You have to pay tax on it!

There are a few exceptions like the bike to work scheme and so on that can actually give you a real benefit and not incur extra tax.

A simple google search on "benefit in kind" will lead you to official information like this: http://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/taxation_of_benefits_from_employment.html

namenotavailablE

It is worth noting however, that typically it makes financial sense to take the BIK hit for something like Health Insurance- remember, to actually earn €1000 net cash from your employment in order to pay a health insurance bill of that amount, it might require that you earn something like €1500 gross (it depends on your tax rate and credits etc). By taking it as a BIK, you pay tax on €1000 instead of €1500 so it costs you less.

srsly78

namenotavailabl wrote: »

It is worth noting however, that typically it makes financial sense to take the BIK hit for something like Health Insurance- remember, to actually earn €1000 net cash from your employment in order to pay a health insurance bill of that amount, it might require that you earn something like €1500 gross (it depends on your tax rate and credits etc). By taking it as a BIK, you pay tax on €1000 instead of €1500 so it costs you less.

Not really no, you get tax relief at source on it anyway. It works out as more of a benefit to the employer than the employee.

namenotavailablE

You should typically come out ahead- here's a few figures using a health insurance premium of €1000 gross per annum (tax relief will bring this down to €800 net):

A single person employed in private sector earning base salary of €40000, no health insurance BIK, totally standard tax credits and cut-off point data: s/he will net €30069 in 2013. However, s/he'll then have to pay a net €800 to the health insurance company leaving cash of €29269.

If the same person adds a BIK for €1000 gross to his/her salary and claims the tax credit of €200 from the Revenue commissioners (which the employer would pay directly to the Revenue), s/he comes out with €29749 i.e. €480 better off.

srsly78

You don't explain it very well, where is the advantage coming from? There should be no difference - the only advantage might be better price on group scheme vs individual scheme.

The tax relief you get is the same in both situations, so why have you come out with one situation ahead?

namenotavailablE

In the above example, the employee was paying a marginal rate of 52% on his/ her earnings (as s/he earned more than €32800). This marginal rate is made up of 41% income tax, 7% USC and 4% PRSI.

Therefore, if s/he takes a BIK of €1000 on top of the base salary, the tax arising is €520. However, this is reduced by €200 (being the tax credit on the health insurance). So, at this point, the employee is down by the extra tax of €320 [520-200].

Where the €480 saving comes in is as follows- since the employer has paid the premium to the health insurance company, the employee doesn't now need to pay it. Therefore, s/he has saved €800 in health insurance deductions that would otherwise occur. This gives a net cash saving of €480 [€800 saved less €320 tax paid].

srsly78

No, the employee must still pay the full whack of tax+usc+prsi on the benefit. In both cases the employee must spend e800 of taxable income (same e200 relief in both case) on the insurance.

In both cases the same tax liability arises, and the same tax relief gets applied. The mistake you have made is not applying the tax relief in the same way between the two cases.

namenotavailablE

Maybe we're making different assumptions- in each case, I assume that the salary is 40k and that in one scenario only the employee gets a benefit on top of the 40k of €1000.
Are you working on the basis that in the "with BIK" scenario that the employee reduces his/her salary by the amount of the BIK, so that the total earnings from employment remain at €40000 ie salary 39k + 1k BIK? In that case, yes, the net remains identical- the €40k "no BIK" employee nets €30069 but must then pay €800 to the insurance company. The €39k + 1k BIK employee nets €29269 but doesn't have to pay anything to the insurance company. the result is that that they both have €29269 cash for themselves.

My calculations worked on the assumption that in each case the employee receives a salary of €40k but in one case gets an additional BIK of €1000 on top of that. While the 'BIK employee' pays more tax (and actually takes home less in his/her paycheque), his/her net cash position is ultimately better because s/he doesn't have to then go and pay €800 to the health insurance company. The saving is €480 as per previous.

srsly78

There is no point in doing the analysis unless the total earnings are the same...

Your example compares someone earning 41k vs someone earning 40k - this misses the entire point of benefit in kind. Another way of phrasing your analysis is "someone getting paid e1000 more is better off". In Ireland you will always be better off if you get paid more (whether via benefit or cash). Only in crazy countries like Belgium (when a higher tier "kicks in") can you end up with less by earning more.

NewApproach

srsly78 wrote: »

There is no point in doing the analysis unless the total earnings are the same...

Your example compares someone earning 41k vs someone earning 40k - this misses the entire point of benefit in kind. Another way of phrasing your analysis is "someone getting paid e1000 more is better off". In Ireland you will always be better off if you get paid more (whether via benefit or cash). Only in crazy countries like Belgium (when a higher tier "kicks in") can you end up with less by earning more.

Not necessarily. High Earner's Restriction and the changes to EE PRSI for low earners can each mean you earn less by earning more.

srsly78

Ok I stand corrected on that point, there are cases where madness can apply in Ireland too! And of course when social welfare comes into it can be even worse.

Generic Dreadhead

.... So because I am part of a (Free?) group health insurance scheme.... this is why my Taxable Earnings are higher than my Total Pay?

srsly78

Yes.