Taxation of Deposit Interest

Hi

I have a rental property and complete a self assessment Form 12 each October for the previous calendar year. My query - deposit interest - is tax & prsi payable on deposit interest. I imagine there are many PAYE workers who earn deposit interest and do not know to declare it and pay tax and prsi on it. Can someone advise please?

Regards

Eugene

DIRT is levied at 20% (standard rate) on deposit interest by the relevant bank. This fully satisfies the individual's liability to tax in respect of deposit interest, regardless of their marginal rate of tax. No PRSI is levied on deposit interest, as it is not 'earned' income.

So no issues for PAYE workers.

So why is additional tax payable by self-assessment based customers?

I don't know-are you sure that it (additional tax) is? Do you include it in the overall return and then take a credit for DIRT deducted? I haven't looked at self assessment in a few years.

Either way, the original query was on PAYE workers and their liability to DIRT, which is fully satisfied by the 20% deduction at source.

CCOVICH said:

.. which is fully satisfied by the 20% deduction at source.

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Is it ?

I am no expert in this & have always assumed that you're liable to pay tax on it at the higher rate, if applicable.

In my PAYE return I record the amount paid by the bank (which is net of tax deducted at the standard rate) and then the Revenue calculate the difference (cos I pay at the higher rate) and factor that into my overall bill.

Then again, with demand deposit rates at 0.02%.

TarfHead said:

Is it ?

I am no expert in this & have always assumed that you're liable to pay tax on it at the higher rate, if applicable.

In my PAYE return I record the amount paid by the bank (which is net of tax deducted at the standard rate) and then the Revenue calculate the difference (cos I pay at the higher rate) and factor that into my overall bill.

Then again, with demand deposit rates at 0.02%.

Click to expand...

As far as I am aware, the liability is fully satisfied by the 20% deducted at source. Try googling and see if it throws up any different answers, but to my knowledge, the relevant rate is 20%, regardless of the individual's marginal tax rate.

It is only 20%. When returned to Revenue, it is calculated along with all other income and the standard rate cutoff point is increased by the amount in question which ensures it is only taxed at the 20% and then a credit is given against the total tax due for the DIRT paid, so there is no further tax liability.
However, this applies to deposit interest only, dividends are taxable at 42% which may be what some of the above posters are thinking of.

Interestingly, as this method shows a nil liability no matter how much the deposit interest amounts to, this is how some of top earners show no liabilty to Income Tax and yet they may actually have paid thousands in DIRT!

The following is a quote from Chapter 2: Taxation of Interest from the Auditor General's website.
The DIRT deducted at the standard rate of income tax from deposit accounts, other than SSAs, was to satisfy the individual's liability to income tax in respect of the interest. Unlike the interest on SSAs, the interest must be included on the individual's tax return and may be liable to PRSI and levies.
This link http://www.welfare.ie/publications/sw74.html#part4 will take you to an explanation of PRSI which states that it is payable on investments including bank interest. Curiously, this doesn't seem to effect PAYE employees. However, I have just discovered that I should have been making returns for years. How much is this going to cost me? Should have stayed in my old job. Now that it will be declared on my tax return, will I have to backdate for the last number of years?

Headache, I think that information is out of date, it frequently happens on government websites (last week I downloaded forms relating to 2001 from the revenue website).
AFAIK Xeresod is correct and the top rate of tax on deposit interest is 20%. Check the revenue website for clarification, or email them.

Yes the top rate of dirt is 20% which is the current standard rate of tax, but the issue here is do I have to make a return for PRSI in addition to that? I have googled everywhere and each site I've looked at including AIB all state that there may be an addtional liability for PRSI levies on top of the dirt already paid. I'd hate to announce myself unneccessarily, if you know what I mean?

If, as seems to be the case, you are self employed then presumably you retain an accountant/tax advisor who can advise on this issue?

Not wishing to inflame the PAYE / Self Employed divide:

- If you file a PAYE return and have 'incidental income' in practice the Revenue did not extract the additional prsi/levies.
- If you file a self assessment return (self employed) you would notice that the hoors take the Prsi/levies on this Case IV income.
- Revnue were told about this, but ignored it.
- They would claim that satisfying the tax liability is not relevant for PRSI ..and of course they would be right... and so they should levy PAYE filers as well...
- But PAYE have no obligation to file a retrurn and so on it goes.

Just filling out form 11 via ROS and notice that, yes, PRSI is computed on gross interest/dividends and added to your tax bill.

The PRSI is charged at 2% employment levy. If you are a proprietary director you will also be charged an additional 3%.

Interesting to note that they ask for the GROSS amount of interest. This can involve a bit of digging. My bank statements only include the net amount, which is 80% of the gross amount. ROS calculates the DIRT (and credits it) based on the amount you put in, so it's important to put in the gross amount. There's no place to enter the actual amount of DIRT paid as this is calculated automatically.

Deposit interest and dividends do not affect the tax due calulation (as the 20% band is automatically increased by the amount of interest/dividends) but the extra PRSI is computed.

If you file manually, they certainly did not charge the 3% .. beware of automation with Revenue!

xeresod said:

Interestingly, as this method shows a nil liability no matter how much the deposit interest amounts to, this is how some of top earners show no liabilty to Income Tax and yet they may actually have paid thousands in DIRT!

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I wonder how many top earners have signigicant amounts of money in deposit accounts? In general most would have most their money in higher yielding investments than that and are likely using other methods to reduce their tax liability.