Instead of scaring you all half to death about what Revenue are doing I wanted to bring some positive news to those of us who are self-employed and to company owner directors. This tax blog will be short and sweet and hopefully useful to those that don’t get the PAYE tax credit that employees are entitled to. Historically the tax code has discriminated against the self-employed compared to employees and one of the obvious ways this manifested itself was that an employee had more tax credits than a self-employed person. The current government has committed to rectify some of the differences and have introduced an Earned Income Tax credit from 1 January 2016. In 2016 this is worth up to €550 to you and that has increased to €950 in 2017 with the commitment to increase it to €1650 to equal the PAYE Credit of the same amount.
What’s the difference?
Tax credits are cash so the more credits you have the less tax you pay. In 2015 a single person who is an employee on a salary of €18000 would have an Income Tax liability of €300 [€18000 X 20% = €3600 – €3300 tax credits] A company director, who owns more than 15% of the company, and a self-employed person with the same €18000 salary/profit would have a tax liability of €1950 or €1650 more than the employee. The tax credits the employee has come to €3300, being the single person tax credit of €1650 and the Paye credit of €1650 whereas the owner director and self-employed individual just has the single tax credit of €1650. If you take the same example for 2016 the employee has the same tax liability as the credits haven’t changed while the self- employed individual’s tax bill has reduced to €1400. This is because the self-employed individual now has the earned income credit of €550 so has total credits of €2200. For 2017 the difference is reduced even further. Again the employee’s tax credits remain the same but the Earned Income credit has increased to €950 so the company director/self-employed individual’s tax bill is now at €1000.
Things to look out for!
If you are entitled to the credit there are some useful things that you need to be aware of. If you do your own tax return or your accountant does it for you the tax credit has to be claimed by ticking the box for it under the personal credits section.
You need to check the computation so that the credit of €550 appears on it as we had some cases earlier in the year where the figure didn’t show up. Revenue rectified this problem by rolling out new versions of ROS Offline so please ensure you have the most up to date version installed. There should be no issue with the on-line version. For owner directors who are on a salary you may already have got the credit through your tax credit certificate but we have seen a case in 2017 where one owner director had the credit on his tax credit cert and his brother ,who is also an owner director of the same company, didn’t have it. You don’t have to wait until the end of the year to sort this out as you can contact Revenue to get the credit during the year.
The credit only applies to earned income and not to investment income such as dividends, rents and deposit interest
What’s the maximum?
The amount of credit you can get depends on your earned income. If you get the full PAYE credit you will not get any Earned income credit as it is not possible to claim both. This could apply in a situation where you are an employee and also self-employed or a company director. For example you are a college lecturer on a salary of €75000 and you also have your own consulting business then you will not get any Earned income credit on the consultancy business profits as you will get the full PAYE Credit on the college earnings. The maximum you can get between the PAYE credit and the Earned income credit if €1650 per annum.
Take an example where an employee has a salary of €6000 in 2017 and a small profit from a food business of €4000. This person would get a PAYE credit on the salary of €1200 [€6000 X 20%] and an earned income credit of €800 [€4000 X 20%] which is a total of €2000 but as the maximum credit between the two is €1650 then the earned income credit is restricted to €450.
As mentioned the maximum credit you can get for 2016 is €550 and for 2017 is €950. To get the maximum credit for 2016 you will have to have earned income of €2750 and for 2017 you will have to have earned income of €4750. If your earned income is less than these two figures then the credit will be restricted to 20% of the earned income.For example in 2017 you have earned income of €4500 then the maximum tax credit will be 20% of that figure which is €900.
In a joint assessment situation each person’s income is looked at separately. Company Director Tony [owns 50% of the company] is on a salary of €50000. For 2017 Tony will get the maximum earned income credit of €950. Tony’s wife Barbara, also works for the company, and is on a salary of €30000. She will also get the full earned income credit of €950 for 2017 as she will not be entitled to the PAYE credit.
As always, if you need any help on this, talk to your accountant or speak to any of the team here