Working out your liability under the new levies

GOVERNMENT MOVES to backdate the recently increased income and health levies have caused consternation. Everyone knew higher levies were coming – the measure had been extensively leaked in the weeks running up to the April 7th announcement – but they assumed that it would only affect income from May. Levies had not previously been introduced or adjusted on a retrospective basis.

That’s certainly what a number of tax advisors thought. They had been advising small business owners and other self-employed individuals to frontload their income where possible to avoid the impact of the higher levies.

News of the effort got back to Government and the decision to effectively backdate the increases to the start of 2009 was justified as an effort to catch people trying, as the Department of Finance saw it, to undermine the drive to increase Exchequer revenues.

However, the measure has had some unintended consequences. Among those caught were people who had taken redundancy in the first four months of the year. Politically, chasing some of the 27,000 people who had already lost their jobs thus far in 2009 for additional tax was something to be avoided and the Government quickly indicated that it will introduce measures in the Finance Bill next month to nullify the blow.

People in receipt in regular annual bonuses were another group suddenly finding themselves in the firing line. Bonuses, especially in financial services, are generally paid in the first quarter in respect of the previous year’s performance.

There were rumblings of discontent that what is a perfectly routine and legitimate exercise by people generally within the PAYE system was somehow being tarred as tax avoidance.

It remains to be seen whether any attempt will be made in the Finance Bill to soften the blow but the Government has made clear that its prime target is people who have taken exceptional income in the first quarter of 2009 compared with previous years.

And then, of course, there are the health levies, which the Government has said will be introduced in the same manner.

So, what will annualising the levies mean in practice?

For those with regular monthly income through PAYE or a pension, there will be no impact. The “composite blended” rates laid out in the table to the right reflect a situation where someone pays the income levy at the old rates up to April 30th and the new rates thereafter. For example, someone in the PAYE system earning €70,000 a year with no bonus will pay a 1 per cent income levy on the €23,333.32 they earn between January and April 2009 – a total of €233.33 – and 2 per cent on their €46,666.64 earnings over the rest of the year, which amounts to €933.33.

Adding the €933.33 and the €233.33 together, it comes to €1,166.66 – which is 1.67 per cent of their €70,000 annual income.

The same principle will apply for the health levies.

But for those with irregular income, it is going to be a bit of a headache. If your earned a disproportionate amount of your annual income at the start of the year, you thought you were going to pay 1 per cent and it’s now higher. Similarly, you won’t be paying 2 per cent over the rest of the year but the annualised rate.

The fact that self-employed individuals have to file annual tax returns – and therefore only really assess liability to tax at that point – will mitigate the confusion.

However, those within the PAYE system – especially those earning bonuses – will find themselves in a position where the Revenue could pursue them for additional tax if the bonus was received in the first four months. Given the relatively small sums involved, it remains to be seen how aggressively it does so.

Conversely, for bonuses received later in the year, employers will deduct the levies at the new, higher rates and the individuals will be entitled to a refund because the annualised rate should apply.

Either way, for people in this scenario, the only way to keep your tax affairs in order is to file a tax return. The problem is that many of those paying tax through PAYE have never filed tax returns and may not realise the importance of doing so this time around.