It’s a universal truth that most of us would rather pay less tax. But, given that a hefty drop in taxes is unlikely, our best option may be to avail of the benefits out there that can help defray your bill; and to be aware of those that can increase it.
Here, we take a look at how the tax system can impact you at different stages of your life.
Twenties
Maybe you’ve just left college, or maybe you’ve been working since you left school, but whatever your circumstances, your 20s are likely to be the time when you begin to pay tax for the first time.
As a student or younger worker, you may not have fallen into the tax net before but once you start working more, you will see the impact of the tax system on your pay packet.
Earnings of €24,000 will be subject to total taxes of €2,843 a year, or an effective tax rate of 12 per cent. Earnings of €36,000, meanwhile, will face a deduction of €6,403 a year, or an effective rate of 18 per cent, according to PwC’s tax calculator.
There are some other tax issues to be aware of at this time. If you've worked abroad, you may be eligible for a tax refund, with rebates typically due from countries such as Australia, New Zealand, the US and Canada. According to Taxback.com, the average refund from the US will be $800 (€671), or Aus$2,600 (€1,642) if you've worked down under.
You may also wish to avail of the Government’s cycle-to-work scheme. This means that you will get tax relief (on income tax, PRSI and the Universal Social Charge) on a purchase of up to €1,500 for an e-bike or €1,200 for a normal bicycle.
So, if you pay tax at the 20 per cent rate, a bike costing €600 will actually “cost” you €427.50, thanks to being able to use tax-free income towards the purchase.
During these years you may also start claiming money back on medical expenses. You can claim back 20 per cent or €13 on a €65 trip to a GP, for example, via the MyRevenue service from Revenue.
Thirties
With an average age of 35 for brides, and 37 for grooms, the typical age of marriage for people in Ireland is now undoubtedly in their 30s. Despite changes in the past few decades, getting married can still convey significant tax advantages, particularly for one-income couples.
A recent report from the OECD found the average “tax wedge” (total taxes on labour paid by both employees and employers) faced by a single worker (32.3 per cent) is more than twice that faced by a one-income married couple with two children (16.1 per cent).
If you don’t get married but have a child, you’ll be able to claim a different benefit, the single person parent tax credit. Only one parent can claim this credit, which is worth €1,650 per year. It means that you will pay €31.73 less in tax a week.
If you have a child, you’ll also be able to claim child benefit, paid at a monthly rate of €140 per child.
Your 30s may also be the time you buy your first home, given that the average age of a first-time buyer today is about 34. This means you may benefit from the State’s Help to Buy scheme, which offers 10 per cent of the purchase price of a new home up to a maximum of €30,000.
It will also mean, however, that you will start to pay property tax, which is set to be revamped this November, for the first time.
Forties
If you had children during your 30s, you may become a stay-at-home parent in your 40s. If you do, it’s important to be aware of a tax credit that can help with the family finances.
The home carer tax credit is worth €1,600, which means that the person earning an income will pay €1,600 less in tax a year. You can also keep earning and claim the credit, but there is an income limit of €10,400 a year and it is paid at a lower amount once the carer’s earnings exceed €7,200.
Before applying for the credit you should consider if you, as a couple, might be better off by being jointly assessed and claiming the higher cut-off point for the standard rate of tax. This allows the spouse who works outside the home to pay tax at 20 per cent on earnings of up to €44,300, so when income is of this level or above, it typically makes more financial sense to claim this. So do your sums before you apply for the home carer credit.
Fifties
Your 50s may be the time when you ramp up your pension savings, and the tax system will help you in this regard. You will be able to allocate 30 per cent of your income to your pension once you turn 50, and pay no tax on this. This means, for example, that on income of €100,000, you can invest €30,000 in your pension, but it will cost you only €18,000. Similarly, someone on earnings of €33,000 can put €9,900 into their pension, and it will cost them only €7,920.
Once you turn 50 you may also be able to access your pension early, which could give you a tax-free lump sum of 25 per cent of its value.
Your 50s may also be the time when you inherit money from your parents. Current rules mean that you will be able to inherit up to €335,000 (including the family home) from a parent without bearing any tax burden. Anything above this, however, will face tax at a rate of 33 per cent.
Conversely, your 50s may also be a time when you want to start passing on your own estate to your children. A tax efficient way of doing this is through the small gifts exemption, which allows you to gift €3,000 a year to a child. If you and your spouse were to do this, €6,000 could be passed on to each child each year, tax free.
Sixties
The sixties are when perhaps the biggest tax bonanzas come into play. One of the biggest advantages of getting older is that your tax bill will shrink. Of course your income might, too, but a lower tax liability can help cushion the impact of falling income.
Firstly, no PRSI applies once you turn 66. This means immediate savings of 4 per cent a year on your income over €352 a week. The PRSI exemption also applies to so-called “unearned” income, such as that earned from rents, dividends or investments.
Secondly, you will benefit from a much greater exemption limit, which can result in significant savings. Take a couple earning €40,000 a year in pension payments. They are giving up about €5,753 of this in tax (including PRSI)* every year, or 14 per cent of their earnings, according to PwC’s income tax calculator. However, once they turn 65, their tax bill (including PRSI)* shrinks to €2,703, or just 7 per cent of their earnings, due also to the impact of marginal relief which limits the amount of tax someone in that age bracket pays at the higher rate, depending on their income.*
And, if you have dependent children, such as those still in college full-time, you will get an increase to the above exemption limits, of €575 per child for the first two children, and €830 for each additional child.
Once you turn 65 you may also be exempt from Dirt tax on deposit income (if you manage to make a return that is, given the current low interest rate environment). The current exemption thresholds are earnings of €18,000 for a single person and €36,000 for a married couple.
Seventies
During your 70s, another tax benefit comes into play: a reduced rate of USC. When you turn 70 you will be entitled to pay a reduced rate of USC, once your income is €60,000 or less. This means that you will pay USC at a rate of just 0.5 per cent on the first €12,012 of your earnings (this is the same for everyone) and 2 per cent on the balance (compared with rates of as much as 4.5 per cent).
Eighties
Nursing home relief may be of concern in your 80s, either on your behalf or for a spouse. If a spouse needs nursing home care and their partner is paying for it, rather than relying on the Fair Deal scheme, they can claim relief on the costs. Relief is offered at the highest rate of tax you pay, so if you have contributed €10,000 towards the cost of nursing home care, and you pay tax at the standard rate, you will be entitled to €2,000 back, or €4,000 if you pay at the higher rate.
Should a spouse die, inheritance tax won’t be a consideration, as the deceased’s estate, including pension structures such as an Approved Retirement Fund, will pass tax free to a spouse. However, if a couple is not married, substantial capital acquisition tax (CAT) bills can arise.
* This article was amended on Monday, September 13th.
