Chapter 12- Taxation Flashcards
What is taxation?
Money paid by people and businesses to the government.
Used to run the country.
Explain what are the reasons for taxation?
To raise money to run the country- pay for government services ex: building roads, running schools
To redistribute wealth- Take money from well off and give to less well off.- government takes higher % of tax from higher waged people- used to pay social welfare
To discourage consumption e.g cigarettes- more expensive so we buy less products who are bad for us
Explain direct taxes
Taxes that are imposed directly on income and are usually deducted at source.
Ex: Pay As You Earn (PAYE); Deposit Interest Retention Tax (DIRT).
Considered to be progressive - those earning the highest income pay the most taxes.
Explain indirect taxes
Taxes on goods or services.
Ex: Value Added Tax (VAT).
Are regressive meaning the rate of tax is the same for everyone and therefore the burden of tax falls heavily on those on lower incomes.
What taxes are paid by households?
Tax on Wages: PAYE, PRSI, USC Value Added Tax (VAT) Capital Gains Tax (CGT) Capital Acquisitions Tax (CAT) Deposit Interest Retention Tax (DIRT) Motor Tax
What is PAYE and what are the current PAYE rates
Pay as you earn is a tax on wages
PAYE is calculated by employer and deducted from an employee’s gross salary
20% on the first €35,300
40% on the balance
Tax Credits then deducted from the PAYE tax paid
What is the formula for PAYE
Formula: (Gross Pay x Rate of Tax) – Tax Credits
What is tax credit and the current rate
Amounts deducted from an employee’s wages reducing their overall tax bill.
Not refundable.
Different people qualify for different tax credits depending on circumstances.
All employees who work for a company receive a PAYE tax credit which in 2019 is €1,650
What is PRSI
Pay related social insurance- taken from employee’s wages by employer and paid to revenue
Current rate of employee PRSI is 4%
Qualifies employees for welfare benefits (e.g jobseeker’s benefit)
Employer’s also pay PRSI for every employee they employ (Employer Tax Rate: 10.95%)
What is the formula for PRSI
Formula: Gross Income x Rate of PRSI
What is formula for USC
Formula: Gross Income x USC rates
What is USC
Universal social charge -tax payable on ALL income (not just wages).
Introduced in 2011.
Introduced as way of making money for government during the recession. Currently being phased out.
Employers deduct from employee’s wages
Progressive
What are Current USC rates?
The current USC rates are: 0.5% (€0-€12,012), 2% (€12,013 - €19,874), 4.5% (€19,875 - €70,044), 8% (€70,045 - €100,000) and 11% on €100,001+
Explain a P45 form used in PAYE tax
Form given to employee when they leave their job.
Contains details of the employee’s Gross Pay, PAYE, PRSI and USC from the start of the year up until the employee leaves the job.
Form needed to claim social welfare benefits or is given to payroll in new job so they can calculate your wages correctly.
Explain P60 form used in Paye Tax
Form is given to every employee at end of tax year by employer
Details of how much gross income was earned and what tax and PRSI was deducted in that year.
Taxpayer has a statutory right
Used to claim a refund from the Revenue or as evidence that enough PRSI has been paid to claim social welfare.
Explain P21 form used in Paye Tax
Given at end of year shows difference between how much tax was paid that year and how much that was actually owed that year.
If an employee has overpaid they are due a refund from Revenue.
If an employee has underpaid they must pay the money they owe back to the Revenue.
What is another name for the P21?
Balancing Statement
Explain P12A form used in Paye Tax
Filled out when person starts working for first time
The Revenue uses this form to calculate a person’s tax credits and their rate of tax
If not filled out before work started, person is emergency taxed and will pay more tax on wages than they need to
What is VAT for household
VAT is a tax on goods and services and is a regressive tax.
Shop owner adds % of price of good to good’s price and customer pays total in. VAT
Four rates of VAT depending on the nature of the good or service. (0%, 9%, 13.5% and 23%.)
Not charged on essentials- education, funeral, medicines, children’s clothing
What is Capital gains tax
Tax paid on profits from sale of asset (e.g shares, investment properties).
Individual must work out the CGT they owe and pay it to the Revenue by certain date.
If not paid- interest and penalities
Annual exemption – a small amount of profit on sale of assets is exempt from CGT.
Not paid on the sale of a family home.
What does CGT stand for
Capital gains tax
What does CAT stand for
Capital acquisitions tax
What is Capital acquisitions tax
CAT - tax paid on value of a gift or inheritance.
Certain amount of gifts/inheritance is tax free and CAT not have to be paid.
Gifts / Inheritances between spouses – no CAT is paid.
Between child and parent – no CAT is paid up to a certain amount but after full CAT must be paid
Individuals calculate their own CAT and pay it over to the Revenue by certain date
What is deposit interest retention tax
Tax paid on interest earned on savings in savings account.
Bank or financial institution where savings are held deduct DIRT at source and pay it to the Revenue.
The amount an individual receives is the Interest minus the DIRT (net interest).
What does DIRT stand for
Deposit interest retention tax
What is motor tax for household/business
Any household with a car must pay motor tax.
Paid to the local county council.
Before 2008 – motor tax is calculated on size of the car’s engine.
Now calculated on car’s CO2 emission levels
Must display tax disc on car as evidence tax is paid
Name 7 taxes paid by a business
Self-Assessment Income Tax Corporation Tax Value Added Tax (VAT) Commercial Rates Customs Duties Employer’s PRSI Motor Tax
Explain self assessment income tax
Paid by self-employed.
Paid on their business profits and the income they received from them.
Individual must work out the tax they owe and file a tax return to the Revenue by the 31st October each year (for previous years earnings)
Self-employed people are subject to audits by Revenue
Explain corporation tax
The tax companies pay on their annual profits.
Current rate Ireland: 12.5% - very low compared with other countries.
Companies must calculate their own corporation tax and file their tax returns with the Revenue.
Companies may be subject to Revenue audits
Explain VAT for business
Pay VAT on goods and services that they buy.
Businesses get a refund of the VAT they have paid.
Also collect VAT on behalf of government on the goods and services they sell and then pay this to government
VAT added to price of products/services
Explain commercial rates
Tax that businesses must pay to their local council every year.
Amount of tax paid is based on the value of the businesses premises.
Value is location, size and nature of business
Goes towards funding the local council’s activities (e.g building roads)
Explain custom duties
Tax paid on goods imported to Ireland by business from a non-EU country.
Calculated as percentage of the value of the goods.
The goods will not be released to business by customs until the custom duty is paid
Explain employer’s PRSI
Must pay PRSI for all of the people they employ.
Separate to household PRSI
Money is not taken from employee’s wages – it is paid out of the businesses profits.
Calculated as % of employee’s wages
Current rate is: 10.95%
What are the effects of taxation on a business
Lower Profits
Lower Sales
Higher Costs
Less Overtime
Explain the similarities between household and business taxation
Must register with Revenue for tax purposes- form detailing name,address,sources of income,claims for tax credits/deductions
Both must calculate amount of tax owed and pay it to Revenue on time e.g CGT CAT- All businesses taxes, also subject to penalties/interest.
Both try minimise tax liability - take advantage of government incentives ex: household pension scheme for tax deduction. Lower corporation tax lower than rate of self assessment
Both must keep proper tax records for at least 6 years - claiming tax credit/deduction must have proof they are eligible
Explain the differences between household and business taxation
Businesses get more tax deductions than households- Can claim tax deduction for cost of buying fixed assets (reducing tax they owe)
Businesses can claim a refund on VAT from revenue paid on business purchases. Households cannot.
Businesses collect taxes on behalf of the Revenue
Businesses pay more taxes than households
Explain progressive tax
Effects those on higher wages more than lower wages
Explain regressive tax
Affect people on lower incomes harder
Explain tax evasion
Taxpayers deliberately fail to pay correct tax they owe by not declaring full amount of their income or claiming tax deductions they are not entitled to.
Illegal- government has heavy penalties
Explain Tax avoidance
Taxpayers take advantage of rules in tax law to reduce tax they owe
Legal
Ex: High income earners lower their tax bill by investing in certain Irish businesses
Explain Lower profits as an effect of taxation on Business
Taxes taken from business profits reduce profit left for business to expanding the business
Taxes make it harder for businesses to grow
Ex: taxes taken from profits (self assessment tax and corporation tax)
Explain Lower Sales as an effect of taxation on Business
VAT is added to price of many products and services a business sells- making them more expensive
Customers buy fewer products
Lower sales
Explain Higher costs as an effect of taxation on Business
Businesses have to work out lots of taxes and pay them to Revenue.
Many business people hire accountant with complicated taxes- fees increase business costs
Employer’s PRSI is added cost as it is money directly from business
Explain Less overtime as an effect of taxation on Business
High taxes act as disincentive for employees to do overtime
Government take over half gross wages in tax
Employees feel overtime not worth it
Business left short of workers in busy times
