ASSOCIATE WITH Taxes Consolidation Act 1997 s472

Employee (PAYE) Credit

Background

Arising from a number of queries to Revenue offices concerning the ‘employee tax credit’ (also known as the ‘PAYE tax credit’), this article outlines the circumstances under which such credit may be granted.

Application of the employee (PAYE) tax credit

Section 472 TCA provides for a tax credit known as the ‘employee tax credit’ (or ‘PAYE tax credit’) to an individual who has emoluments (except for ‘excluded’ emoluments, outlined below) to which the PAYE system of tax deduction at source applies or is applied.

Where, for any year of assessment, a claimant proves that his or her total income for the year consists in whole or in part of such emoluments, he/she shall be entitled to a tax credit of €1,830 (or a lesser amount where the full employee credit is not required to cover the income tax liability).

Irrespective of the number of sources of emoluments to which the PAYE system of tax deduction at source applies or is applied, an individual is entitled to only one employee tax credit. In the case of a husband and wife on joint assessment, each spouse is entitled to the employee credit against their respective emoluments (provided such emoluments are not ‘excluded’ emoluments).

Excluded emoluments

Emoluments to which the employee tax credit does not apply are:

• emoluments paid directly or indirectly by a company, or by anyone connected to the company, to a proprietary director of that company or to the spouse or child of such a director; and
• emoluments paid directly or indirectly by an individual (or by a partnership of which the individual is a partner) to the spouse or child of the individual.

However, subject to certain conditions, the employee tax credit may be claimed in respect of emoluments paid -

• to the children of proprietary directors and
• to the children of self-employed individuals

where such emoluments are paid by a company (or a person connected with the company) of which either parent is a proprietary director, or by an individual (or by a partnership in which the individual is a partner) where such individual is the parent of the child.

The credit is available to the child (other than a child who is himself or herself a proprietary director) if, for the relevant tax year, either (a) or (b), as follows, are satisfied:

1. 1. The employer has, in relation to the emoluments paid to the child in the year of assessment, complied with the provisions of the PAYE system of deduction of tax, insofar as they apply;
   2. the conditions of the office or employment, in respect of which the emoluments are paid, are such that the child is required to devote, throughout the tax year, substantially the whole of his/her time to the duties of the office or employment and he/she is actually so engaged; and
   3. the amount of the emoluments paid to the child in the tax year are not less than €4,572.
2. The child is a specified employed contributor i.e. a person who is an employed contributor for the purposes of the Social Welfare Consolidation Act 2005, but does not include a person -
   1. who is an employed contributor for those purposes by reason only of Section 12(1)(b) of that Act (i.e., an individual who is regarded as an employed contributor simply because all individuals who are in insurable employment for occupational injuries purposes are employed contributors); or
   2. to whom Article 81, 82 or 83 of the Social Welfare (Consolidated Contributions and Insurability) Regulations, 1996 (S.I. No. 312 of 1996), applies (i.e., civil servants, members of the Garda Síochána and the Defence Forces, and certain public servants who were appointed prior to 5 April 1995).

Cross-frontier workers

Under section 472(3) TCA, individuals resident in the State for tax purposes can also claim the employee tax credit in respect of the profits or gains from an office or employment held or exercised outside the State if the profits or gains from that office or employment:

1. are chargeable to tax in the country in which they arise and are subject to a tax deduction system similar in form to our PAYE system,
2. are chargeable to tax in full in this country by direct assessment under Schedule D, and
3. would, if arising in the State and the office or employment were held or exercised in the State and the person making the payment were resident here, qualify for the tax credit.

Note: Section 15 of the Finance Act 2006 provides that so much of the income of a foreign office or employment of an individual as is attributable to the performance in the State of the duties of that office or employment is, with effect from 1 January 2006, chargeable to income tax under Schedule E (instead of Case III of Schedule D) and within the scope of the PAYE system. Where, within the scope of the PAYE system, the employee tax credit is due against such emoluments.

Social Security or Social Welfare Pensions

Irish social welfare pensions

• An Irish social welfare pension qualifies for the employee credit notwithstanding that the PAYE system is not applied to it.

Social security pensions from other EU Member States

• Irish residents receiving social security pensions from other EU Member States may claim the employee credit, notwithstanding that a system similar to the PAYE system of tax deduction was not applied to the pensions.

Social security pensions from non-EU member states

• Social security or equivalent pensions from non-EU member states do not qualify for the employee tax credit unless all of the conditions (a) to (c) in respect of cross-frontier workers apply.

Foreign Occupational Pensions

Where a foreign pension chargeable to tax in the State satisfies all the conditions (a) to (c) in respect of cross-frontier workers, the employee tax credit may be granted against such pension.

Staff of foreign embassies in Ireland

Where the emoluments of foreign embassy employees working in the State are within, and not relieved from, the charge to tax in the State, such employees may claim the employee tax credit notwithstanding that the PAYE system of tax deduction was not applied to their salary/wages.