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Underpayment of Tax

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  • 10-12-2019 6:08pm
    #1
    rsl1976
    Registered Users Posts: 824 ✭✭✭


    Hi,

    a job i worked in a few years back didn't deduct any tax for the 1st year i worked there. When it was eventually sorted i owed 7k which was agreed would be paid back in a reduction in tax credits. Just having a look online and and it mentions that last year the amount due to be repaid was around €400 but the tax credits were reduced by €2000 and the same for next year.

    Does this seem right? If i owe €400 should the tax credits not be reduced by €400?

    I'm probably totally wrong:confused:


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    #2
    phormium
    Registered Users Posts: 3,301 ✭✭✭phormium


    You are taxed at 20% of earnings so the tax on 2,000 of earnings is 400, if they reduced your credits by 400 they would only be giving themselves back 80 quid.


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    #3
    dennyk
    Registered Users Posts: 1,650 ✭✭✭dennyk


    phormium wrote: »
    You are taxed at 20% of earnings so the tax on 2,000 of earnings is 400, if they reduced your credits by 400 they would only be giving themselves back 80 quid.

    That's not how tax credits work; they don't reduce your taxable income, they reduce your total tax owed by the amount of the credit. Tax reliefs (qualifying pension contributions, medical expenses, etc.) are what reduce your taxable income. Revenue taking small amounts owed out of future years' tax credits is normal, but it's always just the amount owed (and I'm surprised they'd take that approach with a tax bill of €7k, really).

    OP, you can ring Revenue and ask. Had they already made a total of €6400 in tax credit deductions in the tax years before 2019? Did you have any other non-PAYE income over the past few years (dividends, rental income, freelance jobs or gigs, etc.) that would have resulted in additional tax owed?


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    #4
    rsl1976
    Registered Users Posts: 824 ✭✭✭rsl1976


    dennyk wrote:
    That's not how tax credits work; they don't reduce your taxable income, they reduce your total tax owed by the amount of the credit. Tax reliefs (qualifying pension contributions, medical expenses, etc.) are what reduce your taxable income. Revenue taking small amounts owed out of future years' tax credits is normal, but it's always just the amount owed (and I'm surprised they'd take that approach with a tax bill of €7k, really).

    dennyk wrote:
    OP, you can ring Revenue and ask. Had they already made a total of €6400 in tax credit deductions in the tax years before 2019? Did you have any other non-PAYE income over the past few years (dividends, rental income, freelance jobs or gigs, etc.) that would have resulted in additional tax owed?


    I can't remember exactly what happened but my employer at the time (2012) wasn't taxing me at all (new job more money and online pay slip I didn't pay attention to what I was coming out with so my fault) so from what I can see online my credits have been reduced by €2000 since 2016 possibly even further back but definitely by that amount since 2016.

    When I got married was jointly assessed and my partner overpaid tax by about 3k so that was offset against the underpayment.

    According to Citizens Advice your tax credits are reduced by the amount owed so that's confusing me


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    #5
    Bruthal
    Closed Accounts Posts: 13,422 ✭✭✭✭Bruthal


    phormium wrote: »
    You are taxed at 20% of earnings so the tax on 2,000 of earnings is 400, if they reduced your credits by 400 they would only be giving themselves back 80 quid.
    If they reduce the 20% tax band by €400 for a person who goes into the 40% band, then that would be an €80 reduction if the person has €400 or more in the high tax band because now an extra €400 is being taxed at the 40% rate instead of 20%

    But reducing the tax credit by €400 would be directly reducing the actual tax credit so the person pays €400 more tax.

    You are confusing tax bands and tax credits.


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    #6
    Bruthal
    Closed Accounts Posts: 13,422 ✭✭✭✭Bruthal


    rsl1976 wrote: »

    According to Citizens Advice your tax credits are reduced by the amount owed so that's confusing me

    There is a tax band of 20% up to about €685 a week.

    And a tax credit of about €65 euro a week. (rough figures probably, for a single person as an example)

    So if a person gets 900 gross a week, 685 is taxed at 20% = €137

    The remainder at 40% = (900-685) = 215 @ 40% = €86

    137+86= €223

    Now the tax credit of 65 is taken off that to leave tax of €158

    The idea of the tax credit is it takes low earners out of the tax bracket altogether etc, (makes the system progressive)

    So as you see, reducing the tax credit by any amount directly reduces your net pay by that amount.

    To get 2000 back of you in a year, is a reduction of weekly tax credit by around €38 a week.


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