Irish workers have continued to enjoy some of the lowest rates of income tax in Europe. The standard PAYE tax rate is now at 20 per cent while the higher rate is 40 per cent. People who are directly employed are taxed under the Pay As You Earn (PAYE) system.

PAYE is essentially an administrative system providing employers with tax-free allowance certificates indicating how much tax should be deducted from an employee's pay each period.

Income Tax Bands

Income tax bands will determine the rate of tax you pay on your income or salary. In the tax year 2007 for example, a single person will pay 20% tax on income up to 28,000 euro and 40% on any balance.

The 'tax year' in Ireland operates on the calendar year basis (i.e., January - December). At the start of each 'tax year', you will receive a statement from the Revenue Commissioners. This statement is called a "Notice of determination of tax credits and standard rate cut-off point". The Notice, shows you the value of your tax credits and your standard rate cut off point.

Tax Credits

Tax credits are the part of your income on which you are not liable for tax. In other words, you do not pay tax on all of your income and you can earn or receive a certain amount of income before you begin to pay tax. What this amount will be, depends on the value of your tax credits.

Tax credits consist of various allowances and reliefs which you may be able to claim, depending on your circumstances. (Every individual can claim a personal allowance for example, and you can also claim relief for items such as private health insurance premiums, mortgage interest etc.). Details of all the main allowances and reliefs (including the amount due for the current year) are given on the explanatory leaflet issued to you each year from the Revenue Commissioners with your certificate of tax credits. This information is also available from your tax office or online from the website of the Revenue Commissioners.

The Standard Rate Cut-off Point

For each pay period, you pay tax at the standard rate (20%) up to your standard rate cut-off point.

Your standard rate cut-off point is calculated by the Revenue Commissioners by adjusting your standard rate band (downwards for any non-PAYE income and upwards for any tax reliefs available at the higher rate of tax). Any income above your Standard Rate Cut-Off Point is taxed at 40%.

To calculate out how much tax you will pay under the tax credit system, you need to do the following:

1. Tax all of your income to find your "gross tax". Income below the Standard Rate Cut-Off Point is taxed at 20%. Any income above the Standard Rate Cut-Off Point, is taxed at 40%.
2. Take your Tax Credits away from your gross tax. This gives you the amount of tax you pay.

Example
Example of a single person without dependent children earning 30,000 euro over a full tax year.

? Step 1 - Calculate Gross Tax on 30,000 euro

Tax 28,000 euro @ 20% (Standard Rate Band is 28,000 euro and there are no adjustments so standard rate cut-off point is 28,000 euro = 5,600 euro
Tax the remaining 2,000 euro @ 40% = 800 euro
Total gross tax = 6,400 euro

? Step 2 Tax Payable

Total Gross Tax = 6,400 euro
Less tax Credits = 1,520 euro
Tax Payable = 4,880 euro
The above is based on a full tax year.
It is important to check with the Revenue Commissioners that you are claiming all the Credits you are entitled to (see Revenue leaflet IT1)

Your own personal circumstances will dictate the amount of tax credits you are entitled to. Further information about tax credits and revisions of existing credits is available from your local tax office.
It's important to be aware that pay you receive through working extra hours (overtime), bonuses etc., is included as part of your taxable pay for that week or month. You do not get any additional tax-free allowances against these additional earnings.
Tax is also payable on earnings of all kinds that result from your employment (including for example, bonuses, overtime, non-cash pay or 'benefit-in-kind' such as the use of company car, tips, Christmas boxes etc.). You do not pay tax on: Scholarship income, Interest from Savings Certificates, Savings Bonds and National Instalment Savings Schemes with An Post, and Payments to approved pension schemes