#2 - Explaining Income Taxes in Ireland

How Irish income taxes are calculated and how to reduce them.

Do you know how much tax you pay? Or exactly how all your payslip deductions are calculated? Read on to learn how and to wise up on how to reduce your taxes…

First, a disclaimer - tax is complicated and depends on individual circumstances. This example is based on an individual PAYE¹ worker, which is applicable to the vast majority of people, but you should always seek independent financial advice on these matters.

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Everyone’s biggest deduction is Income Tax. Here’s how it works:

• Calculate 20% of your earnings up to €35,300 and 40% of earnings above this.

• Next, determine your tax credits - €3,300 for most people (€1,650 for a single person + €1,650 for a PAYE worker) though it can vary.

• Then subtract your tax credits from the figure calculated in Step 1, and that’s how much Income Tax you pay.

Worth knowing - you’ll pay nothing on earnings below €17k, only a ‘little’ on earnings up to €35,300, and an uncomfortable amount on earnings above this. But, there’s an easy way to significantly reduce your income tax that we’ll explain in a future post.

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Next up is PRSI - the tax that funds the majority of social welfare payments:

• This one is complicated with many different classifications, but the vast majority of people pay 4% on all their earnings.

Worth knowing - your employer also pays about 11% of your salary in PRSI.

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Finally, everyone’s favourite, the Universal Social Charge. Similar to Income Tax, it has different rates and thresholds so you pay more as you earn more:

• You’ll pay almost nothing (just 0.5%) on your first €12,012 of earnings, and 2% on the next €8,765.

• The rate rises to 4.5% on earnings above €20,687, and stays at this level before jumping to a whopping 8% on earnings above €70,044.

Worth knowing - at the risk of stating the obvious, USC really begins to bite at higher incomes.

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There might be more…? Skip this if you work in the private sector, but public servants (nurses, guards, teachers etc.) must also pay ASC:

• Introduced in 2009, the Additional Superannuation Contribution is an extra tax on public servants for their pensions. (But don’t make the mistake of thinking your public service pension will be enough to support you - it won’t! We will explain why not in a future post)

• ASC kicks in at 10% on earnings above €34,500 and increases to 10.5% above €60,000.

Worth knowing - this one really hurts, can easily add up to more than USC, and can often catch new public sector employees by surprise.

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These four line items collectively explain your tax deductions. You’ll have noticed that those on low incomes pay almost nothing but that the burden rises rapidly as earnings increase - we’ve written a follow-up article explaining this more. There’s a big jump around €35k (especially for public servants due to ASC) and another at €70k when USC increases. For a detailed breakdown of your circumstances, or to see how a raise / bonus / new job would affect your taxes, see our free calculator here.

But the most important question you should be asking yourself is how to reduce your taxes while improving your long-term financial security. That will be subject of a future post.

Who is this article helpful for:

1. If you’re curious about how your various taxes are calculated.

2. If you’re starting your first job, a new job, or your first job in Ireland and want to see how much tax you’ll pay.

3. If you’re expecting a raise or bonus and want to know how much of it you’ll keep.

4. If you’re interested in ways to reduce your tax bill.

Feedback? Did you find this post interesting? Did you use the tax calculator? Want to more about the how your taxes are calculate? We appreciate feedback so please comment, email, or tweet us.

1. PAYE means Pay-As-You-Earn, and describes the majority of full-time employees whose taxes are automatically deducted at source by their employer and who aren’t obliged to file periodic tax returns pertaining to their income from employment.