Understanding Income Tax in Ireland

What happens when I start work for the first time?

When you start employment in Ireland under the Pay As You Earn (PAYE) system you’ll immediately begin to pay tax (including PAYE, PRSI and USC) on your income.

The amount of tax you pay depends on your salary and personal circumstances. 

Your employer must deduct tax from your pay under the PAYE system. To make sure your employer deducts the right amount of tax, you should register the details of your new job with Revenue.

It’s best to do this as soon as you accept an offer, even if it’s only part-time or holiday employment. This gives your employer and the tax office time to get things sorted out before your first payday.

Revenue will then send a Tax Credit Certificate to you and your employer which shows the total amount of your tax credits and rate band. You should ask your employer if they have received this a week or two after you have registered the new job with Revenue or provide them with the one you received.

When do I start paying income tax?

You’ll typically pay tax from your first payday. The amount depends on your income and tax credits. If your pay on any payday is less than your tax credits then you don’t pay tax on that day. However, if your pay is more than your tax credits, you pay tax on the difference.

If you start work in the first week/month of the tax year, your employer will deduct 1 week’s/month’s fraction of your annual tax credits from your first week’s/month’s pay and will deduct tax from the balance.

For example, if you start work in the 27th week of the tax year, your employer will calculate your gross tax on your wages but you’ll have 27 weeks of tax credits to offset against this liability. This will continue until you utilise all your unused tax credits.

What are the tax bands in Ireland?

There are currently 2 rates of PAYE tax in Ireland, the standard rate of 20% and the higher rate of 40%. The first portion of your income is taxed at the standard rate and once you’ve earned a certain amount, everything after that is taxed at 40%.

Your tax band confirms the amount you can earn before being taxed at 40% and this band is allocated on an annual basis, divided out into weeks or months to help spread your tax evenly.

How is your tax calculated?

When you’re being paid, your employer will apply PAYE and USC tax based on information from Revenue on your employee Tax Credit Certificate. If Revenue doesn’t have up-to-date information on your personal circumstances (marital status, dependents, etc.), this could result in the incorrect allocation of tax bands and credits.

Tip: If you get married/enter into a civil partnership, you should inform Revenue (with your PPS numbers) as quickly as possible to ensure you don’t pay more tax than necessary.

PAYE tax deductions are calculated using one of the following 3 different methods:

1. Cumulative basis

The purpose of the PAYE system is to ensure that an employee's tax liability is spread out evenly over the year. To ensure this, PAYE is normally calculated on a cumulative basis. This means that when your employer calculates your tax liability, they actually calculate the total tax due from 1 January to the date on which the payment is being made.

The tax to be deducted in a particular week or month is the cumulative tax due from 1 January to that date reduced by the amount of tax previously deducted. The cumulative system operates for both tax credits and standard rate cut-off points.

Any tax credits and/or standard rate cut-off points which aren’t used in a pay period are carried forward to the next pay period within that tax year.

Another feature of the cumulative basis is that refunds can be made to an employee where, for example, the employee's tax credits and standard rate cut-off point have been increased.

Tax is calculated at the standard rate of tax on pay up to the amount of your standard rate cut-off point. Any balance of pay above the cumulative standard rate cut-off point is taxed at the higher rate of tax.

The tax calculated at the standard rate is then added to the tax calculated at the higher rate to arrive at the gross tax figure. The gross tax figure is then reduced by the amount of your individual tax credits to calculate how much tax due in that pay period.

So, for example:

If you're a single person and you earn €41,600 per annum (€800 per week), Revenue will issue a Tax Credit Certificate to your employer showing the following figures:

Standard rate cut-off point = €35,300 (per year), €678.85 (per week)  Tax credits -= €3,300 (per year), € 63.46 (per week)

The rates of tax are taken as 20% (standard rate) and 40% (higher rate). The tax calculation for week number 1 would be:

€678.85 @ 20% = €135.77

€121.150 @ 40% = €48.46

Gross tax = €184.23   

Less tax credit of €63.46  

Net tax due = €120.77

2. Non-cumulative basis (week 1/month 1 basis)

In certain circumstances Revenue may direct your employer to deduct tax on a week 1 or month 1 basis. Where the week 1/month 1 basis applies, your pay, tax credits, and standard rate cut-off point are not accumulated for tax purposes.

Your pay for each income tax week or month is dealt with separately. The tax credits for week 1 (or month 1) are applied to pay for each week (or month) and tax is deducted accordingly. You can’t receive any tax refunds in such cases.

Where your employer holds a Tax Credit certificate on a cumulative basis and they subsequently receive a Tax Credit Certificate or tax deduction card issued on a week 1/month 1 basis, the new basis will apply from the first payday after the date of issue printed on the certificate.

3. Temporary basis & Emergency basis

When you leave a job, your employer must notify Revenue that you have finished your employment. Where your old employer fails to notify us you have finished, you can cease your old job by yourself as well.

Entries on the temporary tax deduction card are made on a non-cumulative basis (week 1/month 1 basis) and the calculation of tax due each week (or month) is done on the same basis as in the week 1/month 1 procedure outlined above.

Your employer should give you weekly or monthly tax credits and standard rate cut-off point shown on your ROS records on a non-cumulative basis (week 1/month 1 basis).

You can’t receive a refund of tax while using a temporary tax deduction card.

If you can’t supply your Tax Credit Certificate and PPS number when you start a new job, your employer will be obliged to deduct tax on an emergency basis. In short, this will mean you will pay a higher level of tax until you update your ROS records or update your employer.

What do I pay tax on?

You pay tax on earnings of all kinds arising from your job including bonuses, overtime, and non-cash pay and you can read more about it here. 

You don't pay tax on:

• Scholarship income
• Interest from Savings Certificates, Savings Bonds, and National Installment Savings Schemes with An Post
• Payments to approved pension schemes