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Calculation of Tax Under the PAYE System

1. Employer's duty to deduct tax
2. Calculation of tax - 4 different methods
3. Cumulative basis
4. Cumulative tax credits and standard rate cut-off point
5. Tax deductions and refunds by the employer (cumulative basis)
6. Non-cumulative basis (week 1/month 1 basis)
7. Temporary basis
8. Emergency basis
9. Separate periods of employment with one employer treated as one continuous period for emergency basis purposes
10. Tax exemption and marginal relief
11. Taxation of short-term social insurance illness benefit and occupational injury benefit
12. Jobseeker's benefit
13. Treatment of maternity & adoptive benefits

1. Employer's duty to deduct tax

It is the employer's duty to calculate and deduct the tax, if any, due from the pay, including notional pay (Definition of Pay part 5.2), of every liable employee.

It is important to remember that "employee" includes a director and an occupational pensioner.

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2. Calculation of tax - 4 different methods

PAYE tax deductions are calculated using one of the following methods:

• Cumulative Basis
• Non-Cumulative Basis (Week 1/Month 1 Basis)
• Temporary Basis
• Emergency Basis

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3. Cumulative basis

The purpose of the PAYE system is to ensure that an employee's tax liability is spread out evenly over the year.

To ensure that this is achieved, PAYE is normally calculated on a cumulative basis. This means that when an employer calculates the tax liability of an employee, they actually calculate the total tax due from 1 January to the date on which the payment is being made.

The tax to be deducted in a particular week or month is the cumulative tax due from 1 January to that date, reduced by the amount of tax previously deducted. The cumulative system operates for both tax credits and standard rate cut-off points. Any tax credits and/or standard rate cut-off point, which are not used in a pay period, are carried forward to the next pay period within that tax year.

Another feature of the cumulative basis is that refunds can be made to an employee where for example the employee's tax credits and standard rate cut-off point have been increased.

Calculation of tax

The calculation of tax for each pay period is made by applying the information supplied in the tax credit certificate or tax deduction card against the net pay (Definition of pay part 1), using the following steps:

1. Tax is calculated at the standard rate of tax on net pay up to the amount of the individual's standard rate cut-off point
2. Any balance of net pay above the cumulative standard rate cut-off point is taxed at the higher rate of tax
3. The tax calculated at the standard rate is added to the tax calculated at the higher rate to arrive at the gross tax figure
4. The gross tax figure is then reduced by the amount of the individual's tax credits, as advised by Revenue, to arrive at the tax payable in that week or month

A PAYE employee earns €41,600 per annum (€800 per week). Revenue issued a tax credit certificate to his employer showing the following figures:

• Standard rate cut-off point - €34,000 (per year), €653.85 (per week)
• Tax credits - €3,580 (per year), €68.85 (per week)

For the purposes of this example, the rates of tax are taken as 20% (standard rate) and 41% (higher rate).

The tax calculation for week number 1 would be as follows:

€653.85 @ 20% = €130.77

€146.15 @ 41% = €59.92

Gross tax = €190.69

Less tax credit of €68.85

Net tax due = €121.84

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4. Cumulative tax credits and standard rate cut-off point

The totals of the employee's tax credits and standard rate cut-off point for the year are given on the tax credit certificate issued to the employer by Revenue.

If the employee is paid weekly, this figure is divided into weekly amounts on a cumulative basis, as in the following example:

• Yearly - Tax credits €3,580, Standard rate cut-off point €34,000
• Monthly - Tax credits €298.34, Standard rate cut-off point €2,833.34
• Weekly - Tax credits €68.85, Standard rate cut-off point €653.85

Tax for any week is computed by reference to the cumulative tax credits and standard rate cut-off point.

For a pay day falling in week 3, the cumulative tax credits are €206.55 and the standard rate cut-off point is €1,961.55

For a pay day in week 5 the cumulative tax credits are €344.25 and the standard rate cut-off point is €3,269.25

If any change occurs which affects the employee's tax credits or standard rate cut-off point Revenue will issue a new tax credit certificate showing the new tax credits/standard rate cut-off point now due.

Tax for any month is computed by reference to the cumulative tax credits and standard rate cut-off point.

For a pay day falling in month 3 the cumulative tax credits are €895.02 and the standard rate cut-off point is €8,500.02

For a pay day in month 5 the cumulative tax credits are €1,491.70 and the standard rate cut-off point is €14,166.70

If any change occurs which affects the employee's tax credits or standard rate cut-off point Revenue will issue a new tax credit certificate showing the new tax credits/standard rate cut-off point now due.

5. Tax deductions and refunds by the employer (cumulative basis)

Tax Credits are non-refundable.They are used to reduce tax calculated on net pay (paragraph 3).

Where a cumulative tax credit certificate is held, any unused tax credits are carried forward on a cumulative basis to subsequent pay periods within the same tax year. Tax credits unused at the end of the tax year, 31 December, are not carried forward to the following year.

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6. Non-cumulative basis (week 1/month 1 basis)

In certain circumstances Revenue may direct an employer to deduct tax on a week 1 or month 1 basis. This instruction will be clearly given on the tax credit certificate.

Where the week 1/month 1 basis applies,

• the pay
• the tax credits and
• the standard rate cut-off point

are not accumulated for tax purposes.

The pay for each income tax week or month is dealt with separately. The tax credits for week 1 (or month 1) are applied to pay for each week (or each month) and tax is deducted accordingly. No refunds may be made by the employer in such cases.

Although pay is not accumulated for tax purposes, the employer must take total pay to date into account for the purpose of the ceiling for PRSI contributions.

Where an employer holds a tax credit certificate on a cumulative basis and they subsequently receive a tax credit certificate or tax deduction card issued on a week 1/month 1 basis, the new basis will apply from the first pay day after the date of issue printed on the certificate.

7. Temporary basis

The temporary tax deduction basis must be used where the employer has been given parts 2 and 3 of a current year or preceding year form P45, stating:

• the employee's PPS number and
• the employee was not on the emergency basis and

the employer has sent part 3 of the form P45 to Revenue and is awaiting the issue by Revenue of a tax credit certificate.

The entries on the temporary tax deduction card are made on a non-cumulative basis (week 1/month 1 basis) and the calculation of tax due each week (or month) is done on the same basis as in the week 1/month 1 procedure outlined in paragraph 6

The weekly or monthly tax credits and standard rate cut-off point shown on form P45 should be given to the employee on a non-cumulative basis (week 1/month 1 basis).

A refund of tax should not be made to the employee where a temporary tax deduction card is in use.

The temporary procedure continues until a tax credit certificate is received from Revenue.

Note: An employer who took on an employee at the end of say 2008 who produced a 2008 P45 and for whom a tax credit certificate has not yet issued for 2009 may continue to use the tax credit and standard rate cut-off point as per the 2008 P45 in 2009.

8. Emergency basis

The circumstances in which the employer will use the emergency basis are described in Employer's PAYE records part 9.2.

The current emergency tax rates (MS Word, 31KB) are published on the Revenue website.

Different rules for emergency tax apply depending on whether or not the employee has provided the employer with their PPS number.

Where the employee does not provide their PPS number

Where the employee does not provide their PPS Number, the higher rate of tax applies to all earnings.

Tax credits and standard rate cut-off point for employees that have not provided their PPS number

Week or month	Standard rate cut-off point	Tax credit
All	Nil	Nil

If a new employee does not hold a PPS number they should be advised to call in person to any Social Welfare Local Office and ask for Leaflet SW100 to apply for a PPS number.When they have been allocated their PPS number from the Department of Social Protection, the Revenue Form 12A - 'Application for a Certificate of Tax Credits and Standard Rate Cut-Off Point' (PDF, 211KB) should be completed and sent to Revenue.

Where the employee provides their PPS number

Where the employee provides their PPS number the provisional tax credits and standard rate cut-off point to be granted are as outlined in the following tables for weekly, monthly, fortnightly, four-weekly and twice-monthly paid employees.

Weekly Paid

Week of employment	Weekly standard rate cut-off point	Weekly tax credit
First	1/52nd of single personal standard rate cut-off point	1/52nd of single personal tax credit
Second	As for first week	As for first week
Third	As for first week	As for first week
Fourth	As for first week	As for first week
Weeks 5 to 8 inclusive	As for first week	Nil
Week 9 and subsequent weeks	Nil	Nil

The rates at which tax is to be deducted are the rates of the standard rate of income tax and the higher rate of income tax in force for the relevant year.

Provisional tax credit for employees who get paid monthly

Month of employment	Month standard rate cut-off point	Month tax credit
First	1/12th of single personal standard rate cut-off point	1/12th of single personal tax credit
Second	As for first month	Nil
Third and subsequent months	Nil	Nil

The rates at which tax is to be deducted are the rates of the standard rate of income tax and the higher rate of income tax in force for the relevant year.

Provisional tax credit for employees who get paid fortnightly

Fortnightly pay day	Fortnightly standard rate cut-off point	Fortnightly tax credit
First	2/52nds of single personal standard rate cut-off point	2/52nds of single personal tax credit
Second	As for first pay day	As for first pay day
Third	As for first pay day	Nil
Fourth	As for first pay day	Nil
Fifth and subsequent pay days	Nil	Nil

The rates at which tax is to be deducted are the rates of the standard rate of income tax and the higher rate of income tax in force for the relevant year.

Provisional tax credit for employees who get paid four-weekly

Four-weekly pay day	Four-weekly standard rate cut-off point	Four-weekly tax credit
First	4/52nds of single personal standard rate cut-off point	4/52nds of single personal tax credit
Second	As for first pay day	Nil
Third and subsequent pay days	Nil	Nil

The rates at which tax is to be deducted are the rates of the standard rate of income tax and the higher rate of income tax in force for the relevant year.

Provisional tax credit for employees who get paid twice-monthly

Twice-monthly pay day	Twice-monthly standard rate cut-off point	Twice-monthly tax credit
First	1/24th of single personal standard rate cut-off point	1/24th of single personal tax credit
Second	As for first pay day	As for first pay day
Third	As for first pay day	Nil
Fourth	As for first pay day	Nil
Fifth and subsequent pay days	Nil	Nil

The rates at which tax is to be deducted are the rates of the standard rate of income tax and the higher rate of income tax in force for the relevant year.

Quarterly, half-yearly and yearly paid

For the quarterly, half-yearly and yearly paid, the tax credit to be applied is 1/12th of the single personal tax credit and the standard rate cut-off point is 1/12th of the single personal standard rate cut-off point.

Where an employee without a PPS number subsequently provides one

As outlined previously,where an employee commences employment and does not provide their PPS number the higher rate of tax applies to all earnings. Where the employee subsequently provides their PPS number (while still on emergency basis), the tax credits and standard rate cut-off points to be granted are as outlined in the corresponding pay period in the above tables. The employee's previous pay periods are not recalculated to grant tax credits and standard rate cut-off points for those previous pay periods.

For example, an employee commences a weekly-paid employment and does not provide their PPS number. They will pay tax at the higher rate of tax on all earnings. The employee provides their employer with their PPS number in their 3rd week of employment. For their 3rd weekly pay period tax will be calculated allowing the tax credit and standard rate cut-off point for week 3 as outlined in the above tables. Weeks 1 and 2 will not be recalculated to grant a tax credit or a standard rate cut-off point for those weeks.

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9. Separate periods of employment with one employer treated as one continuous period for emergency basis purposes

It is important to note that where an employee has separate periods of employment with one employer in one income tax year, to which the emergency basis applies, the employment is deemed to commence at the start of the first of these periods and continue to the end of the last period of employment or 31 December whichever is earlier.

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10. Tax exemption and marginal relief

A small number of employees/pensioners are entitled to tax exemption and marginal relief each year.

Any individual/married couple whose total income from all sources is less than or equal to the exemption limit appropriate to them will not have to pay tax for that year.

Any individual/married couple whose total income from all sources is over the exemption limit may qualify for marginal relief. This means that when their wages or pension exceeds a certain limit, they are taxed at 40% instead of the higher rate of tax in operation for that year. If the employee/pensioner is entitled to tax exemption and marginal relief, the higher rate of tax shown on the tax credit certificate will be 40%.

The decision regarding any individual's entitlement to exemption and marginal relief is made by Revenue - not by the employer. The employer must operate PAYE in accordance with the tax credit certificate issued.

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11. Taxation of short-term social insurance illness benefit and occupational injury benefit

Illness Benefit (formerly known as Disability Benefit) and Occupational Injury Benefit payable by the Department of Social Protection are taxable payments. When an employee is absent from work due to illness and receives or is entitled to receive short-term illness or occupational injury benefit, tax is collected through the PAYE system. These benefits are not however subject to PRSI or Levies.

Where an employee becomes entitled to receive such benefits, employers are required to make certain adjustments to their normal PAYE procedures to take account of these benefits.

The first 6 weeks (36 days) of Illness Benefit and Occupational Injury Benefit payments in the tax year are exempt for tax purposes. Child Dependant additions (i.e. additional payments made to claimants in respect of qualifying children) are also exempt for tax purposes.

Note: References to Illness Benefit include short-term Occupational Injury Benefit. Taxable Illness Benefit refers to Illness Benefit payable less any Child Dependant additions.

Notification from the Department of Social Protection

The Department of Social Protection will notify all employers of the amount of the weekly taxable Illness Benefit which an employee is entitled to receive while out sick, and also the date the payment commenced.

A week's Illness Benefit consists of payment for 6 days (excluding Sundays). Therefore, the daily rate is one-sixth of the weekly rate.

Calculation of exemption period

Illness Benefit payable for the first 36 days in the tax year is exempt from tax. Sundays and the 3 “waiting days” for which Illness Benefit is not payable are not included in calculating the 36 days for which exemption is due.

Where an employee uses the full exemption in one single sick period, the exemption will, effectively, expire 39 days (excluding Sundays) from the first day of absence i.e. the 3 “waiting days” for which Illness Benefit is not payable plus the 36 days for which Illness Benefit is payable. However, it should be noted that, where an employee uses the exemption over more than one period of absence where claims for Illness Benefit are separated by more than 3 days, the 3 “waiting days” for which Illness Benefit is not payable apply to each separate claim period. In such circumstances the aggregate 36 day exemption period may be increased by 3 days for each separate period of absence.

Action by employers - general

The taxation of these payments through payroll will not be relevant for many employers or employees because significant numbers of employees will be exempt from taxation of Illness Benefit, as they will receive payment of Illness Benefit or Occupational Injury Benefit for less than 36 days in the tax year.

Where it is relevant, the taxation of Illness Benefit through payroll will depend on the particular circumstances or arrangements between employers and employees while employees are out sick. These arrangements are set out in the following paragraphs. As well as knowing the amounts of their employees' Illness Benefit payments, some employers will also be aware of the period to which the payments relate. Consequently, they will have the appropriate information to tax the Illness Benefit through payroll. They should, therefore, take immediate action in accordance with the appropriate section below to effectively tax Illness Benefit through payroll, after the relevant exemption period expires.

Where the employer is not aware of the amount of an employee's Illness Benefit but is otherwise in a position to take the necessary action, the basic personal rate of payment (available from www.welfare.ie) should be assumed until advised otherwise by the Department of Social Protection or by Revenue.

Employers who pay wages, salary, etc., to employees while out sick and recover the short-term Illness Benefit or Occupational Injury Benefit from the employees

The arrangement between these employers and employees will be such that the employer will be aware of:

• the date the employee went out sick
• the date from which Illness Benefit or Occupational Injury Benefit became payable
• the make-up of the Illness Benefit or Occupational Injury Benefit (i.e. Personal Rate, Adult Dependant and Child Dependant additions, if relevant etc.)

Such employers should take appropriate action without reference to the notification from the Department of Social Protection, as they will already have all the relevant information to apply the exemption and taxation rules for Illness Benefit.

The amount of Illness Benefit the employee is entitled to receive for 36 days in total in the tax year is exempt and should be excluded from payroll for tax purposes. Therefore only the difference between the wages, salary etc. paid and the Illness Benefit recovered is subject to tax and PRSI for the duration of the exemption period. If an employee is still out sick after the exemption period expires and continues to receive and pay over Illness Benefit or Occupational Injury Benefit to the employer while out sick, tax should be deducted from the net wages, salary etc., less the Child Dependant additions of Illness Benefit, if relevant. However, PRSI should only be charged on the difference between the net wages, salary etc., and the amount of Illness Benefit received. While Illness Benefit less Child Dependant additions is taxable after the exemption period expires, it is not chargeable to PRSI.

Employers who pay wages, salary etc., to employees while out sick (top-up etc.) and the employees retain the Illness Benefit or Occupational Injury Benefit

Where an employer pays the employee's full or partial wages while out sick and the employee retains the Illness Benefit, the employer may include the taxable Illness Benefit with earnings.This will have the effect of maintaining the cumulative system of PAYE. Under such a procedure the combined amount would be charged to tax but only the actual earnings paid by the employer would be charged to PRSI. For the purpose of the exemption such employers will be aware of the employee's circumstances. Until the Illness Benefit exemption period expires, tax and PRSI should be charged only on the wages actually paid. When the period of exemption expires the Illness Benefit should be taxed through payroll as outlined above.

However, some employers may not be able to include taxable Illness Benefit with earnings. To maintain the cumulative system of PAYE, those employers can opt to reduce the employee's weekly/monthly tax credits by the weekly/monthly taxable amount at the standard rate of tax and reduce the weekly/monthly standard rate cut-off point by the full taxable amount.

Employers who do not pay wages, salary etc., to employees while out sick and the employee retains the Illness Benefit or Occupational Injury Benefit

During the Illness Benefit or Occupational Injury Benefit tax exemption period, no adjustments for tax purposes are required and the cumulative system of PAYE (paragraphs 3 - 5) continues unchanged.

The exemption period should cover the majority of employees. However, if an employee is out of work due to illness after the exemption period expires, the following action should apply:

Some employers who do not pay wages, salary etc., to employees while out sick may wish to maintain the cumulative system of PAYE. Taxable Illness Benefit or Occupational Injury Benefit, payable after the period of exemption expires, may be included as earnings on the tax deduction card and the cumulative system of PAYE continued as normal. However, it may not be possible for other such employers to maintain the cumulative system. In those circumstances, when the employee returns to work, the weekly/monthly tax credits and standard rate cut-off point should be applied to the employee's earnings on a Week 1/Month 1 basis -

• until the end of the tax year (31 December) or
• until confirmation is received from Revenue that the cumulative basis should be reinstated, in which case Revenue will issue a cumulative tax credit certificate stating the amount of taxable Social Welfare benefits, if any, to be taken into account as pay by the employer.

The provisions under which refunds of tax may be made, during periods of absence from work due to illness after the exemption period expires, do not apply unless Revenue confirm that they should apply. It is essential that weekly/monthly tax credits and standard rate cut-off points are not accumulated and tax refunds inadvertently made. If a cumulative tax credit certificate or tax deduction card is received for an employee who was or is still out sick after the exemption period expires, this documentation should only be used after checking with Revenue that it is in order to do so as Revenue may not be aware that the employee was out sick from work and in receipt of Illness Benefit or Occupational Injury Benefit.

Tax documents

Where taxable Illness Benefit or Occupational Injury Benefit is included with earnings and taxed through payroll as such, total pay shown on tax documents e.g. P45, P60, P35, should be inclusive of the taxable benefit.

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12. Jobseeker's benefit

A portion of Jobseeker's Benefit (formerly known as Unemployment Benefit) is taxable. This will not affect employers as Revenue will collect any tax due.

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13. Treatment of maternity & adoptive benefits

Maternity & Adoptive Benefits are not regarded as income for the purposes of the Income Tax Acts and should be disregarded for all tax purposes.

Whether the payment must be taken into account by the payroll office will depend on the particular circumstances or arrangements between employers and employees while employees are on maternity or adoptive leave and in receipt of Maternity or Adoptive Benefit from the Department of Social Protection.

The treatment in specific situations is outlined below:

Employers who pay wages, salary, etc., to employees while out on maternity or adoptive leave and recover the Maternity or Adoptive Benefit from the employees or directly from the Department of Social Protection

In such circumstances, only the difference between the wages, salary, etc. paid and the Maternity or Adoptive Benefit recovered is subject to tax and PRSI in the pay period.

Employers who pay wages, salary etc., to employees while out on maternity leave or Adoptive Leave (top-up etc.) and the employees retain the Maternity or Adoptive Benefit

Where an employer pays an employee full or partial wages or salary while out on maternity or adoptive leave and the employee retains the Maternity or Adoptive Benefit, tax and PRSI should be charged only on the full amount of wages or salary actually paid.

Employers who do not pay wages, salary etc., to employees while out on maternity or adoptive leave and the employee retains the Maternity or Adoptive Benefit

If owing to the absence from work through maternity or adoptive leave, the employee is entitled to receive no emoluments on the usual pay day, the employer shall, on application being made in person by the employee or their authorised representative, make such repayment of tax to the employee as may be appropriate, having regard to their cumulative emoluments at the date of the pay day in question and the corresponding cumulative tax.

Alternatively, on the employee's return to work after a period of maternity or adoptive leave, any refund of tax which may be due to the employee for the current tax year, can be calculated having regard to their cumulative emoluments at the date of the pay day in question and the corresponding cumulative tax. In this situation the employer should contact Revenue to confirm that it is in order to make such a refund. If the period of maternity or adoptive leave was over two tax years, the employee can apply to Revenue for any refund that may be due for the year prior to the current year.

Of course an employer should not make a refund unless they are in possession of current year cumulative tax credit certificate in respect of the employee in question.

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