We often come across errors in our customers taxes that need to be fixed and that lead to a tax refund. One of the most common is where they, or their spouse if married, are not receiving the correct PAYE tax credit or in some cases they may not be receiving it at all. In this post we will just explain a little about what the PAYE tax credit is, how it is calculated and go through examples of why it can be incorrect.
First of all PAYE stands for Pay As You Earn. As most of you will know from being in employment, that unfortunately the more you earn, the more tax you pay. The main tax that we pay is PAYE tax and to help reduce the amount you have to pay, you receive this tax credit if you have any income that is subject to tax under the PAYE system. So this is income from your job or pension and certain social welfare income too.
How is the PAYE Tax Credit Calculated?
The PAYE tax credit is calculated at 20% of your income and is capped at €1,650. So any total income below €8,250 the credit is apportioned to 20% of that income and anything above you get the €1,650. So as an example, someone with income of €4,000 would receive a PAYE Tax Credit of €800. A common misconception is that this is a monetary amount and that you can get the €800, as in this example, back from Revenue. Remember it is a tax credit and tax credits are used to reduce your PAYE tax liability. They do however turn into refunds when you claim them for a prior year where they were not awarded. At the moment you can claim tax credits that you have missed out on for the last four years, so that is 2012 to 2015.
What can go Wrong?
There are a few different instances where we have seen an incorrect PAYE Tax Credit or where it is missing completely and the individual is completely unaware.
In our first example (see below) we will look at a case where the PAYE credit is missing completely. In this case the individual had requested a P21 refund letter from Revenue and as you can see they are receiving the Home Carers Tax Credit, Flat Rate Expenses for his job and received a refund cheque from Revenue themselves. However, as can commonly happen, the spouse is in receipt of Social Welfare income, in this case Illness Benefit. Now this is a taxable source of income, therefore time this income does entitle the individual to the PAYE tax credit as well. As you can see below this is not always applied to your tax credits.
Thinking that Revenue had refunded everything they were due already, they asked us to do our complete check to see if anything was missing.
This is something that we can spot pretty quickly as part of our review process. Once we had seen the existing incorrect P21 we applied to have the credit added. So in this case the credit was worth €639.82 (€3,199.08 x 20%), which lead to a refund of the same amount.
In our second example we have a case where the individual has reduced their PAYE Tax Credit and their Personal Tax Credit as well. In this case it lead to the dreaded underpayment. Remember not all underpayments are correct, as they are just based on the information that Revenue have for you on their system. So if that information is incorrect, as in the below example, the underpayment can be incorrect too.
Again as part of our review we spotted this pretty quickly. In this case we were not only able to remove the underpayment but we were also able to claim the Home Carers Tax Credit and the Rent Tax Credit too to turn the underpayment into a refund!
Exceptions for the PAYE Tax Credit
There are some unique cases where you may not be entitled to the PAYE Tax Credit and these are as follows:
- Proprietary directors, their spouses or civil partners or children
- The spouse or civil partner or child of a person paying the income
- The spouse or civil partner or child of a partner in a partnership
What to check for your PAYE Tax Credit?
If you are unsure as to whether you are receiving your PAYE Tax Credit remember the following:
- If your income is below €8,250 then you’ll get 20% of that amount, anything above this figure you should get the full credit of €1,650
- If you are married check that both of you are receiving your own individual correct PAYE Tax Credit
- You don’t always need the full PAYE Tax Credit. Sometimes if you have other tax credits and earn a certain amount where you don’t have to pay any PAYE tax then the PAYE Tax Credit can be restricted so your taxes can balance.
If you have any questions please feel free to ask in the comments section below.
Remember, to get your full 4 year tax review CLICK HERE, enter your details and we will take it from there.
Written by Ray Byrne