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Saturday, 4 February 2012 |
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Working in Ireland: income tax rules
Wednesday, 3 December 2003
Your potential liability to income tax in Ireland will depend on a number of factors, including whether or not you, and your employer, are resident in Ireland and whether the duties of the employment are actually carried out in Ireland. In determining your income tax liability the Irish Tax Authorities would look at whether or not you are:
- Resident in Ireland
- Ordinarily resident in Ireland
- Domiciled in Ireland
If you fall into any one, or more, of the above categories you may well have a liability to tax in Ireland. If you are not resident in Ireland but the duties of your employment are carried out in Ireland, or if you have investment income arising in Ireland, you may also have tax to pay in Ireland.
Resident and Ordinarily Resident
The rules for determining whether or not you are resident and/or ordinarily resident depend on the amount of time that you spend in Ireland. There are two alternative tests for determining an individual’s residence for tax purposes.
First test, you will be resident in Ireland if you are present in Ireland for 183 days or more in a tax year. A tax year starts on 1st January and ends on 31st December.
Second test, if you are not resident by reference to the first test, the second test will be applied. Under the second test, you will be treated as resident in Ireland if you spend 280 days or more in the tax year in question and the previous tax year taken together. For example, if you first came to Ireland in 2003 and you spent 150 days here in 2003 you would not be resident for that tax year. However, if you spent a further 150 days here in 2004 you would be resident for 2004 as you would have spent more than 280 days in Ireland during the two tax years. In applying the second test of residence, periods of presence, which do not in total exceed 30 days in a tax year, are disregarded.
Example
If you came to Ireland in January 2003 and left permanently on 30th January 2004 you would clearly be resident for 2003 as you would have spent more than 183 days in Ireland. Looking now at the tax year 2004, even though you would have spent more than 280 days during 2003 and 2004 combined you would not be regarded as resident for 2004 as your days in Ireland during 2004 did not exceed 30.
You will become ordinarily resident once you have been tax resident in Ireland for three tax years consecutively.
If you previously lived in Ireland and you are now living overseas you will have shed your ordinarily resident status if you have three consecutive tax years of non-residence in Ireland. If you are now thinking of returning to Ireland, significant tax savings through careful tax planning may be achieved if you are an Irish citizen not ordinarily resident here, or if you are not domiciled in Ireland.
Income tax and the remittance basis
As a tax resident you would be liable to tax on income arising in Ireland, (eg. income from employment in Ireland; rents from property situated in Ireland; interest arising on bank accounts in Ireland etc). You would also be potentially liable to income tax in Ireland on worldwide income. However, the remittance basis may apply to overseas income if you are:
(a) An Irish Citizen who is resident but not ordinarily resident in Ireland or
(b) An individual who is not domiciled in Ireland.
Under the remittance basis you would only pay tax on amounts of income remitted into Ireland from overseas sources, eg.
- From an overseas employer
- Overseas bank interest
- Overseas dividends and other investment income
Therefore, if you fall into one of the categories mentioned at (a) or (b) above, and you work for an overseas employer (even though all the duties of your employment may be carried out in Ireland) you may only have to pay tax on your overseas earnings to the extent that they are remitted to Ireland. Therefore, with careful tax planning before you take up employment in Ireland significant tax breaks may be achieved. Please note, however, that the remittance basis of assessment does not apply to income arising in the UK.
Savings that you had prior to becoming tax resident in Ireland can generally be remitted into Ireland without incurring a tax liability. However, if interest (ie. income) has been added to the savings account while you are resident in Ireland you may have a tax liability on the interest. Again, with careful planning income tax can be saved by splitting the interest from the capital.
Allowances and Reliefs
If you do fall into the Irish income tax net there are certain allowances and reliefs that may be claimed. Where possible you should negotiate for your employer to pay your relocation costs, which in some cases, may be paid tax-free.
Strictly, if you are resident for a tax year you will be resident for the whole tax year - therefore, any income earned during the period from 1st January and the date of your arrival may be subject to income tax in Ireland. However, split year residence relief may be claimed and if you meet all of the conditions then, for employment purposes, you will be treated as resident in Ireland only from the date of your arrival which means that any income earned overseas prior to your arrival would not be subject to tax in Ireland. If you have investment income arising overseas, relief may be available under the tax treaty (a tax treaty that exists between Ireland and the overseas country).
The main tax reliefs are summarised below:
- tax free relocation costs
- split year residence relief
- relief under the double tax treaty
- mortgage interest relief
- rent relief
- certain medical/dental expenses
- certain tuition fees
- permanent health insurance
- pension contributions
Personal allowances and income tax rates
Ireland operates a system of tax credits rather than personal allowances.
The income tax credits for 2003 are:
Single persons €1,520
Married couples €3,040
PAYE Credit* €800
* Not available to proprietary directors and the self employed
The income tax rates for 2003 are as follows:
Single persons
20% on the first €28,000
42% on the balance
Married persons (one spouse working)
20% on the first €37,000
42% on the balance
Married persons (both spouses working)
20% on the first €56,000
40% on the balance
Social Security and Levies
Employees
In addition to income tax there are also social security taxes that have to be paid on earned income. From 1 January 2003 employees social security is charged at the rate of 4% on income up to €40,420. In both cases, the first £127 of weekly earnings is exempt.
There is a health levy which is charged at the rate of 2% on all income (without limit). The health levy does not apply if aggregate earnings are less than €18,512.
Self-Employed
Self-employed individuals pay social security at the rate of 3%, plus the 2% health levy on all income without limit.
This article is intended to be a brief guide only and should not be acted upon without advice from a taxation advisor.
Imelda Prendergast is Partner – OSK Contracting at OSK Accountants and Business Consultants. OSK Contracting specialise in providing accounting and taxation advice to both Irish resident contractors and contractors coming to work in Ireland from overseas.
Imelda Prendergast (prendergasti@osk.ie)
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