Hi Folks. Would really appreciate some advice on this.
Very tricky to advise in a situation like this without all the information...
First, and very pertinent, question is will you be required to pay maintenance to your wife (legally bound under the deed of separation) - as distinct from any amount of maintenance for the children?
Will either child / children stay overnight with you at least one night during the year?
Are you living with a new partner?
Essentially when you separate the default position is that you each become taxed as single people again. If you are paying maintenance for your estranged wife (again, as distinct from maintenance for the kids), then it is taxable as income in her hands, and you are entitled to a full deduction for it.
So, if you earn 42k under PAYE and you pay 8k maintenance to her, then your taxable income is 34k (hence the relevance of my first question, particularly to high rate taxpayers).
You would also be entitled to the one parent family tax credit, provided kid/kids stay with you at some point in the year, and that you aren't living with another partner (hence the relevance of the other two questions).
Alternatively, you can jointly elect (i.e. you both agree, and request in writing to Revenue) to continue to be treated under aggregation (joint assessment in layman's terms). This would mean that any maintenance you pay is ignored for tax purposes. You would each be treated as individuals during the tax year, and after the year has ended, you can transfer any tax credits / standard rate band that your wife hasn't used, in the same way as you always would have.
In the above scenario then, where the husband is the only one earning, with an income of 42k gross, and any maintenance payable is for the kids, the two alternatives play out as follows (assuming you aren't living with a new partner):
1. No election to be aggregated - treated as single:
Husband:
Income (after deducting maintenance): €42,000
Std rate band is 36,800 (increase of €4k if you are a One Parent Family)
Notional tax payable 36,800 @ 20% + 5,200 @ 41% = 9,492
Tax credits - Personal 1,650 + One Parent Family 1,650 = 3,300
Tax payable - 6,192
Wife:
Income from maintenance: Nil
Notional tax: Nil
Tax credits - Personal 1,650 + OPFC 1,650 = 3,300 (
these go unused)
Tax payable - Nil
Total tax paid on €42k of income: €6,192
2. Election for aggregation:
Husband:
Income (no deduction for maintenance): €42,000
Std rate cut-off will be 32,800 during year, but €9k can be transferred from wife at year-end, meaning std rate band is effectively €41,800
Notional tax (41,800 @ 20% + 200 @ 41%) = 8,442
Tax credits - Personal 1,650 + Wife's unused personal credit = 3,300
Tax payable 5,142
Wife:
Income: Nil
Notional tax: Nil
SRCOP: €32,800 (
€9k used by husband)
Tax credits: Personal 1,650 (
fully used by husband)
Total tax paid on €42k of income: €5,142
From this example you can see that in general, if only one party has income, and there isn't maintenance, then it works out better to go for aggregation...
HOWEVER...
If maintenance of €8k is being paid:
1. No election to be aggregated - treated as single:
Husband:
Income (after deducting maintenance): €34,000
Std rate band is 36,800 (increase of €4k if you are a One Parent Family)
Notional tax (all @ 20%) 6,800
Tax credits - Personal 1,650 + One Parent Family 1,650 = 3,300
Tax payable 3,500
Wife:
Income from maintenance: 8,000
Notional tax 1,600
Tax credits - Personal 1,650 + OPFC 1,650 = 3,300
Tax payable - Nil
Total tax paid on €42k of income- 3,500 + Nil = 3,500
2. Election for aggregation:
Husband:
Income (no deduction for maintenance): €42,000
Std rate cut-off will be 32,800 during year, but €9k can be transferred from wife at year-end, meaning std rate band is effectively €41,800
Notional tax (41,800 @ 20% + 200 @ 41%) = 8,442
Tax credits - Personal 1,650 + Wife's unused personal credit = 3,300
Tax payable 5,142
Wife:
Income: Nil
Notional tax: Nil
SRCOP: €32,800 (
€9k used by husband)
Tax credits: Personal 1,650 (
fully used by husband)
Total tax paid on €42k of income: €5,142 + nil = €5,142
So, in a case where maintenance is being paid for the benefit of the spouse, it may well be better not to opt for aggregation.
The moral of the story is that the optimum position, tax-wise, will entirely depend on the individual situation, and other considerations will come into play, as the aggregation option means that to some extent your tax affairs will still be linked, so good communication may be needed...
I hope that helps, tried to keep it simple as possible, but it may not make any sense to you...!
