Q&A:

I have been informed by the income tax office that I have to pay tax on maintenance from my ex-husband and that I will come under the self-employed category.

I will get a tax credit of €1,650 but no PAYE credit. Is there a possibility of paying any tax due monthly to qualify for the PAYE tax credit or is there any better way of reducing my tax liability?

My income is only from the maintenance for myself of €10,000 per annum. How much in tax and levies will I be liable for?

Ms RO’C, email

Assuming your ex-husband and you have a formal maintenance agreement, confirmed through the courts, Revenue is correct to inform you that you are liable for income tax on the money paid.

They are also correct that you will be treated on that income as a self-assessed person. That means that, although you will get a personal allowance, you are not eligible for a PAYE allowance. It’s not possible to secure a PAYE allowance simply by agreeing to pay your tax bill monthly. If you are supporting a child and part of that maintenance bill is for the child, that portion is not taxable for you, or the child.

You state that your only income is the maintenance which amounts to €10,000. The first thing of note on that income is that you will not pay any universal social charge. USC applies only to those with income of more than €10,036. If your income is just above that level, you will be liable to a USC levy of 2 per cent.

On income tax, your gross income is taxed at 20 per cent, giving a tax bill of €2,000. However, your personal allowance is offset against this, leaving you with an annual tax bill of €350.

PRSI is also levied on self-employed income, including maintenance payments under Class S, at a rate of 4 per cent, giving you a PRSI bill of €400.

Thus your full liability to tax and levies – assuming the €10,000 is your sole income – is €750 per annum.

Do loans to my
children need a
legal agreement?
I loan each of my children a sum of money and they repay €3,000 yearly. I then gift each €3,000 yearly. Does this arrangement have to be drawn up by a solicitor or accountant, or is it sufficient for us to write our own agreement?

Mr A T , email

I think you are making things unnecessarily complicated. If you loan your children a certain sum, why not simply gift them the €3,000 annually rather than have them repay you and then gifting the money?

If your intention is that the children need the lump sum upfront for some reason but that you do not wish, ultimately, that they should have to repay it, that would seem a far more straightforward way of doing it.

There is no need to pay for professional services to execute such an arrangement.

Gift below €3,000 leaves Cat limit
untouched
In a previous column, I think you missed the point being raised. As it was a question in my mind, I was reading your answer carefully.

That question is – does the €3,000 annual tax-free gift come into the computation of the €250,000 lifetime limit of gifts to a child.

I presume it does not – ie you could gift €3,000 per year, for example , 10 years and then gift €250,000 on your death (or otherwise) all tax free.

So the lifetime limit is €250,000 plus as many annual €3,000 as you manage to do?

Mr PG, email
Your understanding is correct. The annual gift tax exemption limit – which currently stands at €3,000 – is over and above the lifetime ceilings for gifts and/or inheritances in the capital acquisitions tax code.

So you can currently gift up to €3,000 a year from your after-tax income (or savings) without the recipient having to worry about any tax liability.

You can continue to do this – either for a child or anyone else – for as long as you choose/can afford to, and it will in no way impact on the lifetime threshold for gifts or inheritances from you to them.

Just one thing to bear in mind. The annual threshold for gifts or inheritances between parents and children has now been reduced to €225,000 – that is to any child from both parents.

The point here is that you cannot take it for granted that the annual tax-free sum will remain at €3,000. After all, the rate of capital acquisitions tax, capital gains tax and Deposit Interest Retention Tax have all risen in recent times as the State looks to replenish the coffers plundered by the banks.

This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.