PAYE and Credits

[Sidetracker]

Hi. I have just received my PAYE Tax balancing statement for 2009. On checking it, I note that I have been taxed on my FULL earnings Before applying my tax credits. Is this correct ? . Doing it that way I reckon that I am paying approx. €2,000.00. more Tax.

 

[Jano]

Your gross tax should be calculated on your gross taxable pay and then your tax credits are deducted at the end to give the net tax. This is the amount of tax you will actually pay. The purpose of tax credits is to reduce the amount of tax you pay. Your gross taxable pay may be less than your gross pay if for example you pay pension contributions.

 

[Sidetracker]

Hi Jano. My gross pay has been calculated with my Contributory Pension added on, then tax has been applied, THEN my credits have been applied ?

 

[Berni]

Is that a pension that is being paid to you? If so then that is correct.
Jano is refering to contributions into a pension.

 

[Graham_07]

Hi Jano. My gross pay has been calculated with my Contributory Pension added on, then tax has been applied, THEN my credits have been applied ?

If this refers to Contributory state pension received then the computation is correct. Tax is computed on the gross amount then credits are deducted.

 

[Andrew Duffy]

If your tax credit was subtracted from your gross taxable income before calculating tax due, you would end up paying more tax - a tax credit of say, €3000, cancels out the (20%) tax on €15,000 of gross income.

The old system of tax-free allowances and tax tables was replaced in 2001 with the current tax credits system to make it less likely that a PAYE worker could underpay by being on the wrong table; by that stage the extra calculations required to implement the tax credit system were irrelevant due to computerisation.