1. 4 Personal Taxes

Direct and Indirect Taxes

The government collects revenue through two main categories of taxation:

• Direct taxes are paid out of a person's income or wealth, for example tax on wages or on savings interest.
• Indirect taxes are added onto the price of goods and services and collected by retailers when people spend money.

Key Personal Taxes and Charges

Different taxes arise on specific occasions throughout life:

• PAYE: Income tax deducted straight from an employee's gross wage each payday.
• PRSI: A deduction from wages that builds up a worker's entitlement to social welfare benefits such as the State Pension and Illness Benefit.
• USC: A statutory charge paid on gross personal income above a minimum threshold.
• DIRT: Tax deducted automatically by banks from the interest earned on personal savings.
• Local Property Tax (LPT): An annual charge paid by owners of residential properties, based on the property's market value.
• Motor Tax: A compulsory annual payment for the right to drive a vehicle on public roads, calculated using engine size or CO2 emissions.
• Excise Duty: A tax added to specific goods, including petrol, diesel, alcohol, and tobacco, to raise revenue and discourage consumption.
• VAT (Value Added Tax): A tax added to the price of most goods and services, paid by the shopper at the till and passed on to Revenue by the seller.

Purposes and Types of Tax Systems

Taxes affect households differently depending on how they are charged:

• Progressive tax: Takes a higher percentage of income as a person earns more. PAYE is progressive, making it fairer for lower earners.
• Regressive tax: Takes a larger proportion of income from lower earners than higher earners. VAT is regressive because everyone pays the same rate on an item, so the tax takes a bigger share of a low earner's income.

Governments tax for four reasons: to raise revenue for schools, hospitals, and roads (financial and legal, as paying tax is a civic duty), and to make society fairer and healthier by redistributing income through social welfare and discouraging harmful goods like cigarettes (ethical and social). Hiding income to avoid tax is illegal tax evasion.

Wage Slips and Calculating Net Pay

An employer must provide a wage slip setting out earnings and deductions. The calculation follows a clear sequence:

• Basic Pay + Overtime = Gross Pay, the total earnings before any deductions.
• Gross Tax = Gross Pay × Tax Rate. The exam question will provide the tax rate or rates. If a standard rate cut-off point is given, apply 20% up to the cut-off and 40% to the balance, then add them together.
• PAYE Due = Gross Tax - Tax Credit.
• Statutory deductions must be taken by law: PAYE, USC, and PRSI.
• Voluntary deductions are chosen by the worker, such as private health insurance or a sports club fee.
• Gross Pay - Total Deductions = Net Pay, the actual take-home wage.

Key terms

Direct Tax

A tax paid directly out of an individual's income or wealth.

Indirect Tax

A tax added to the price of goods and services when spending money.

PAYE

Pay As You Earn; income tax deducted directly from an employee's gross wage by the employer.

Tax Credit

A state allowance that directly reduces the gross income tax an employee owes.

Basic Pay

The agreed wage earned for normal contracted working hours before extra pay or deductions.

Overtime

Extra pay earned for hours worked in excess of normal standard working hours.

Gross Pay

An employee's total earnings before any statutory or voluntary deductions are removed.

Net Pay

Take-home pay calculated by subtracting all deductions from gross pay.