PAYE

PAYE

PAYE is a method of tax deduction by which an employee’s income tax on remuneration is deducted and accounted for to the Revenue, by the employer. It also applies director’s fees, in which case, the company must deduct tax and account for it to the Revenue. PAYE also applies to pension payments and benefits in kind. The system also applies to PRSI and Universal Social Charge. Tax on termination payments and expenses are subject to PAYE.

The basis of the employee’s (or other taxpayer’s) income tax remains annual. The taxpayer may make or in some cases is obliged to make a tax an annual tax return. He receives a credit for tax deduced as formerly set out in Form P60. If, as is commonly the case, full credits and deductions are not reflected in the deducted amounts, he may be entitled to a refund of tax overpaid.

Under the PAYE system, the entity which pays (e.g., the employer) deducts an amount each period (weekly or monthly) from the salary (etc.) and remits it to Revenue.   The system provides for an annual, monthly or weekly estimated deduction, which seeks to pay the approximate overall tax liability over the relevant tax year. Tax is paid cumulatively throughout the year.  The tax deducted is the cumulative amount of tax due, less that already paid.

PAYE Modernisation

Finance Act 2017 introduced the PAYE modernisation program  effective from 1^st January 2019. This was the most significant change to  PAYE since its introduction. It is provided that employers must update and report on employee’s pay and  deductions as they are paid. This facilitates greater Revenue information and  automatic reconciliation of the employer’s tax position at intervals in  the tax year. It  gives employees the full benefit of their entitlements during the year.

Certain changes came into effect as of 1^st January 2018. They included a change in the basis of taxation under which most PAYE taxpayers are liable to pay income tax from an earnings basis to a receipts basis. There is a new provision for the assessment  on a grossed  up  basis of income where PAYE is not operated by an employer.

Deductions

The PAYE system  deducts tax from payments to employees , uniformly over the year.  It  removes the obligation to make a formal return in respect of most employees.

The tax which is required to be deducted for each particular week,  is the tax due to that date from the beginning of the year, less the total of the amounts previously deducted. The system seeks to collect the tax due for the entire tax year through these uniform deductions.

Pay for the purpose of PAYE includes all emoluments, wages, pensions, bonuses, commissions,  benefits in kinds, and similar payments since in 2004.  Notional pay is applied to the value of the benefit in kind. Net pay, for the purpose of the application of PAYE, is gross pay plus notional pay less pension contributions and permanent health insurance contributions.

PAYE is operated on taxable pay.  This is gross pay, less notional pay for benefits in kind less pension and permanent health insurance contributions. Certain expenses may be paid gross and round sum allowances may be agreed by the Revenue.  The position applies cumulatively throughout the year. It looks at tax due to be deducted to date and tax paid and deducted to date for each payment.

Registration

 An employer must register for PAYE with the Revenue Commissioners. There is a unique tax registration number for PAYE. Failure to do so is an offence. They may be registered by Revenue if they neglect or fail to do so. The obligation applies to domestic and foreign employers where the employment is exercised in the State.

Where the employee is undertaking duties for an entity other than the employer in the State, that entity is obliged to operate PAYE in relation to the income related to those duties. This entity is obliged to register and account for PAYE notwithstanding that it is not the employer.

Statement of Deductions

Prior to 2019, The Revenue issue a certificate of tax credits and standard rate cut off point or “tax deduction card” to the employer for each employee.  The tax deduction certificate gave details of tax credits, the standard rate cut off point and applicable tax rates.  It allowed the employer to calculate the appropriate tax deductions required.

After January 2019 the employer requests a Revenue Payroll Notification for the employee which contains the certificate of tax credits and standard rate cut off point. This should reflect information in respect of pay and tax deductions made in previous employments during the tax year.

The employee makes a claim to the Revenue in respect of entitlement to tax credits and deductions. The standard rate cut off is the standard rate tax band adjusted in the circumstances so as to allow for other income reliefs or credits.

Revenue Notification

The Revenue payroll notification should include details of

• Standard rate cut off point
• USC cut-off point
• Tax credit
• Pay to date
• Tax and USC deducted to date
• Exemptions where applicable
• LPT to be deducted where applicable

Liability and Payment

PAYE applies to the gross pay less pension contributions. The standard rate applies to the standard rate cut off point. The higher rate applies over that. Tax credits are applied and RPN sets out the tax payable.

 The standard rate applies up to the standard rate cut off point for that period.  The balance is subject to higher rate tax.  The tax calculated is reduced by tax credits. Tax credits do not roll forward.  If they are not used in the year they are wasted.

Tax must be paid by the fourteenth day of the following month.  Interest applies at 0.0274 % per day, if the tax is not paid on time. Formerly at year end, an employer must file a Form P35 with the Revenue Commissioners.  This details gross pay, tax, social insurance, universal social charge deducted. Benefit in kind details must be included in the P35. It must be filed by 15 February in the following year.  A P60 must also be given to the employee at this time.

PAYE is applied at the standard rate of  20 percent on amounts up to the standard rate cut-off point. It is applied at the rate of 40 percent on the balance.

• Revenue permit PAYE not to be applied to a genuine foreign office or employment.  The individual must be paid for by an employer not resident in the State;
• the costs of employment is not borne by a permanent establishment in the State; and
• work performed in the State is for less than 60 days in the tax year concerned.

The amount of tax due per  the monthly statement  is to be paid by the 14^th day of the month following the payment month, extended to the 23^rd day if returns are made electronically (as will almost invariably be the case).

Employees

Each employee has a unique tax number.  These now issue automatically.  Each employee receives a certificate of tax credits and standard cut off points.  This is based on the most recent tax return.  The employee may claim additional credits and the Revenue will issue a revised certificate if he is entitled to them.

Employees may have deductions or reliefs against tax at the top rate or standard rate.  Where the reliefs apply at the top rate, the tax credit is granted by increasing the standard rate to reflect the relief.

In some cases, Revenue reduces the standard rate point and band in order to tax other income.  This is an alternative to accounting for it through the self-assessment system at year end.  If the employer does not deduct the tax, Revenue may pursue the employee for the tax due.

Finance Act 2015 provided that a PAYE taxpayer is taken out of self-assessment, provided his income is less than €5,000. The figure had formerly been €3,174. The income is to be coded into PAYE tax credits and the standard cut off point or through DIRT. It effectively removes this income from PRSI as well. It applied as and from 2016 forward.

The Inspector of Taxes may require an employee to make a tax return, notwithstanding that his earnings have been fully taxed through PAYE.  There are obligations for persons who have used certain tax shelters to make a return, where the obligation would not otherwise apply.

Employee’s Account

The “My Account” and “ROS”  systems allows PAYE taxpayers to claim for relief under PAYE  electronically.  Certain options are available by touchtone telephone. The following may be permissible through ROS (Revenue online service) .

• amending personal details;
• amending tax credits;
• claiming tax credits;
• reallocating credit between employments and/or spouses;
• claiming repayments.

Revenue have power to make repayments of tax deducted where they are satisfied on the basis of information in their possession, that the tax has been overpaid.

Cross-Border

Non- resident employers may be obliged to operate PAYE in respect of an employment carried out in Ireland.  If PAYE is not applied by the employer, certain other persons such as intermediaries or other entities, may be obliged to account for PAYE.

There are certain exceptions to the obligation to operate PAYE in respect of temporary assignees, subject to conditions.  The duties of the employment performed in the State must not exceed 60 days. The income should be taxed in the home country under the double taxation agreements.  Certain conditions apply for this exemption.

PAYE may not be applicable where a double taxation agreement applies. The foreign employer may be required to register for PAYE in Ireland.  Records must be kept regarding the employee assignment, employment salary and benefits.  The employer must undertake to pay any income tax found subsequently due.  Evidence of withholding tax in the other country must be available.

Prior approval for  non-deduction of PAYE by way of a PAYE exclusion order is required.

Temporary/Emergency tax.

Where a new employee provides a PPS number, limited tax credits and a limited standard rate cut-off point are given.  These cut-off rates and points apply for a period of  weeks, and effectively allow time for issue of a certificate individualised for that person.

An employee may be subject to the temporary “week one” non-cumulative basis where there is no RPN immediately available. In this case, tax is paid on the gross pay net of pension deductions.  Neither the tax credits standard rate cut off point are factored in. Each periods pay is dealt with separately.

A person will may be subject to the temporary or “emergency” tax basis, where the employer has not received the Revenue payroll notification. This may occur where the employee does not have a personal public service number or is not registered with Revenue for PAYE.

Where a PPS number is not provided, tax is on the gross pay without deduction for tax credits. The rate is the higher tax rate and the higher USC rate.

When the RPN becomes available, the tax liability due under PAYE will be adjusted and excess tax be repaid. PAYE taxpayers can use the ROS system to claim tax credits and amend personal details.

There is a tax obligation on taxpayers to keep and preserve supporting documentation for claims for six years.  Revenue is entitled to examine a claim within four years and may require the supporting relevant documentation.

Employers’ Obligations

Prior to 2019 employers were obliged to furnish P 45 and P60 documents to their employees in connection with the operation of PAYE. This is no longer required as the relevant information is held and supplied by Revenue. Post 2019, the position is set out on the taxpayer’s My Account or ROS.

Each employee must be registered with Revenue. When they cease employment, Revenue must be notified.

The RPN  is furnished for each payment date. The employer notifies Revenue of the payroll date for each employee.

The return is made monthly by the employer. Revenue issue a statement based on information furnished early the following month (after the payment month) setting out the relevant liability. This may be treated as accepted and deemed to be the returned, if not amended or corrected. If there are errors they must be corrected.

The amount of tax due per  the monthly statement  is to be paid by the 14^th day of the month following the payment month, extended to the 23^rd day if returns are made electronically (as will almost invariably be the case).

Modernisation Legislation

The legislation sets out changes to part of the Taxes Consolidation Act to give effect to the PAYE modernisation provisions. This includes technical changes to a USC  as a consequence of real time reporting obligations on employers.

There are provisions for

• The electronic system of PAYE provision of real time information to Revenue
• employers making  monthly returns in place of annual returns regressing in  certain circumstances where PAYE is not correctly operated and a requirement to maintain a register  employees and
• the assessment of tax where the employee does not pay the correct amount to Revenue.

53rd Week

The Finance Act 2018 makes a number of changes to the Taxes Consolidation Act 1997 to ensure that when employed individuals, who are paid on a weekly or fortnightly basis, have an extra payday in a tax year, commonly referred to as a “Week 53 payday”, they will not have an underpayment of tax when their liability is reviewed after the end of the year of assessment.

Where the provision applies, the deductions and tax credits specified, together with the appropriate standard rate band, will be increased by 1/52. In addition, if the tax exemption provided for in section 188 (age exemption and associated marginal relief) applies, it will also be increased. Where the individual is paid fortnightly, the increase will be 1/26.