If you have ever asked yourself how tax credits work in Ireland or what is the standard rate of income tax, then know that you are not alone. These impact our daily lives, yet there is a lot of uncertainty about what they actually mean. The recently enforced Finance Bill 2022 has included updates to tax rates and bands, tax credits and the treatment of PRSA contributions. These changes came into effect on 1st January 2023, but what does it mean for you? We are not accountants, nor are we tax advisers, but we can help explain some of the major changes of the Finance Bill 2022 and what they mean for you. Low and high-income earners would have noticed a positive difference in their net salary in January 2023. Every payslip we receive shows our gross salary and how this is impacted by our Tax Credits, PAYE, PRSI and USC. (It also shows any optional deductions such as pension but more to come on that in a future post.)
Your tax credit refers to an amount you can earn which will not be liable for income tax. Everyone residing in Ireland has a Personal Tax Credit which is mostly based on your marital status and whether you are solely or jointly assessed. Tax credits reduce the amount of tax you pay and these amounts have been updated under the Finance Bill 2022 as follows:
So if you are a single person, you can earn €1775 pa in the year which will not be subject to any income tax.
The Universal Social Charge tax thresholds have also changed under the Finance Bill 2022. USC is a tax you pay on different levels of income. So for the first €12,012, you earn you pay 0.5% and this increases to 2%, 4.5% and 8% on increasing levels of income. The 2% threshold now applies to income from €12,012 to €22,920 (this was €21,195 in 2022). This increase in the threshold means you can take home more money by paying less USC tax on a portion of your income.
The standard rate of income tax in Ireland (Pay As You Earn) refers to what % of the tax you will pay on your income. The lower tax rate is 20% and the higher is 40%. As of 1st January 2023, anything you earn below €40,000 is subject to 20% tax, and the balance is taxed at 40%. This is an increase of €3,200 from 2022. Once again this increase in the cut-off means you can take more money home by paying less tax on a portion of your income. Other notable changes include a renter’s credit of €500, and also an increase in the Small Benefit exemption from €500 to €1000 and the number of ‘qualifying incentives’ to two. The removal of the BIK charge on employer contributions to PRSA’s has also indicated massive changes in the pension landscape particularly for the self-employed.
For the various reasons outlined above your take home pay in 2023 is much higher than your take home pay based on the same gross salary in 2022. For higher tax rate payers in Ireland, an increased monthly pension contribution of €115 will leave your 2023 payslip exactly the same as your December 2022 payslip. As retirement provision becomes more important and more topical it may be a good time to consider increasing your own pension contributions, particularly as the Finance Bill 2022 has achieved increased net pay for a lot of employees in Ireland.