Tax Relief for Lump sum under Section 480 TCA 1997

Hi,

I recently applied for Tax Relief for a lump sum paid to me by my employer for change of work practices (Section 480 TCA 1997) dating back to 2011.
Revenue have responded and rejected the claim on the basis that as I was already on the higher rate of tax at the time, so no refund is due. They said that a refund would only be due if I had been on the lower rate of tax and the compensation amount had put me on the higher rate. The Revenue website however makes no reference to tax bands and just says the following:


The relief is such as to reduce the total income tax for the year of assessment to:

• the income tax which would have been payable by the employee if he/she had not received the lump sum,
  
  plus
• tax on the whole of the lump sum computed at a special rate (an effective rate on the payment if one third only of the lump sum was paid)

Does anyone have experience of this? Are Revenue correct?

Thanks.

D.

They are right - that is, assuming they are right in saying that your income in the year without receipt of the lump sum already placed you in the higher tax band.

Lets say you earn 50k - this puts you in the higher rate of tax, so you pay 41% tax on every additional €1 you earn. Lets say for argument's sake you pay €9k of tax on the €50k of income.

Now lets say they give you a €10k lump sum payment.

Now your total income is €60k and they tax the additional €10k at 41%. That's €4,100, bringing your total tax paid to €13,100.

When you apply for relief they calculate the amount of tax you would have paid, if only one third of the lump sum was paid to you. In your case that would be a lump sum €3,333 and because you are already a high rate taxpayer, it would all be taxed at €41% (additional tax of €1,366.67).

The effective rate under this special calculation is therefore €1366.67/€3333.33 = 41%.

The income tax payable had you not received the lump sum (€9k)
PLUS
Tax on the whole of the lump sum at the special rate (€10k @ 41% = €4100)
EQUALS
Tax payable €13,100

There is no difference - the relief makes no difference to you.

It only makes a difference if you had been earning below the high rate threshold, and I'll do a second example below to illustrate the point.

Lets say you earn 30k - this keeps you in the lower rate of tax, so you pay 20% tax on every additional €1 you earn, until your income exceeds 32,800. Lets say for argument's sake you pay €2,500 of tax on the €30k of income.

Now lets say they give you a €10k lump sum payment.

Now your total income is €40k and they tax the additional €10k as follows:
First €2,800 at 20% = €560
Remainder €7,200 @ 41% = €2,952
Additional tax = €3,512 (NB This equates to an effective rate of 35.12%)

This results in total tax payable of €6,012 (€2,500 + €3,512)


When you apply for relief they calculate the amount of tax you would have paid, if only one third of the lump sum was paid to you. In your case that would be a lump sum €3,333 and it would be taxed as follows:
First €2,800 at 20% = €560
Remainder €533 @ 41% = €219
Additional tax = €779

The effective rate under this special calculation is therefore €779/€3333.33 = 23.37%.

The income tax payable had you not received the lump sum (€2,500)
PLUS
Tax on the whole of the lump sum at the special rate (€10k @ 23.37% = €2,337)
EQUALS
Tax payable €4,837

Tax payable without the S480 relief was €6,012 and tax payable after applying the relief is €4,837 - the relief to be granted is the difference between the two - so €1,175 will be due back to you.

This is the difference between an effective rate of 35.12% and an effective rate of 23.37% on the €10k payment. (€10k @ 11.75% = €1,175).

As you can see, the effective rate can only be below 41% if the income without the lump sum was low enough that some of the payment falls to be taxed at 20%.

Thanks for info. Revenue's website site didn't make any of that clear.

9035575 said:

Thanks for info. Revenue's website site didn't make any of that clear.

Click to expand...

It actually does - I did all of the calculations per my 2 example scenarios based solely on the couple of sentences you quoted in your original post above.

As you appear to be on a roll with this: Revenue's response to me said that 'Generally, only those on the lower rate of tax can benefit from tax relief....". The fact they they use the word 'Generally' coupled with the knowledge that I am aware of people on the higher rate who recieved relief leads me to the conclusion that there are conditions/circumstances under which people on the higher rate can get relief. Any idea what they might be?