It pays to make allowances with tax

Thousands of people are not making use of the tax reliefs available to them, writes Laura Slattery.

Most people, not just bin tax protesters, object to paying more than what they consider to be their fair share of tax. Yet anecdotal evidence suggests that thousands of people still overpay their tax by failing to make use of the reliefs and allowances available to them.

Some self-assessed taxpayers - the ones with their accountant's telephone number on speed dial - will be able to recite the full list of expenses they can claim against tax, right down to the exact percentage of lighting and heating bills for their home office.

But PAYE workers, who grimly watch as large chunks of their salary are deducted on their payslip, typically do not make a tax return.

Unless they have additional gross earnings, they are under no obligation to go through that particular trauma. However, by not bothering to send the Revenue any claim forms at all, they could be missing out on their entitlements.

Tax avoidance (not to be confused with tax evasion, which is illegal) is often associated with property and other investment schemes for people who are already wealthy.

Making extra contributions to a pension is also a frequently cited method of keeping tax bills down.

Up to the age of 30, a person can contribute 15 per cent of their salary to a pension and not pay any tax on it.

These tax limits increase to 20 per cent of salary for people in their 30s, 25 per cent for people aged 40-49 and 30 per cent of salary for people aged 50 and over.

Not everyone will want to tie additional cash up until they reach retirement age to lower their tax.

But there are ways that individuals and families can minimise their tax bill without having to invest to do it.

Some tax reliefs, such as mortgage interest relief, are now granted at source. Others demand a little research, careful document keeping and the inevitable form filling.

Tax credits

PAYE taxpayers should check with the Revenue that they are receiving their full entitlement to tax credits. Self-assessed taxpayers can claim for these on their tax return. The credits available include a one-parent family tax credit of €1,520, a home carer's tax credit of up to €770, a widowed person's tax credit, a widowed parent's tax credit, a dependent relative tax credit, and an incapacitated child tax credit.

Medical expenses

The cost of routine visits to the doctor seems to have crept up in recent years.

Some good news, especially for 42 per cent taxpayers, is that consumers can claim relief at their higher rate of tax on medical expenses incurred by themselves or their family, if the expenses have not been reimbursed under any other health insurance or compensation scheme.

The first €125 of expenses incurred in any tax year is not eligible for the relief, which self-assessed taxpayers can claim on their Form 11 tax return and PAYE workers can claim by filling out form MED 1, available from the Revenue.

Sight testing and routine dental treatment do not qualify, however some dental costs may qualify and may be claimed using form MED 2. This must be completed and signed by the dentist.

The cost of routine healthcare relating to pregnancy is eligible for the relief since the 2001 short tax year.

Service charges

Taxpayers are eligible for tax relief at the standard rate of 20 per cent on charges paid to local authorities for bin collection, water supply and domestic sewage disposal, to private contractors in the case of bin collection and to group water schemes for domestic water supply.

The amount allowable for tax relief on the purchase of tags for bin collection is restricted to €195 per annum.

Both people on self-assessment and PAYE workers should claim relief for the cost of tags by applying directly to the tax office.

Homeowners should keep the stubs of their tags to claim the relief for the previous calendar year, using form SC1.

Local authorities advise the tax office directly of specific annual charges paid to them. For individuals on PAYE, the relief will be incorporated into their certificate of tax credits. Self-assessed taxpayers can claim the relief on their tax return.

Rent-a-room relief

Both single people and couples trying to grab the first rung of the property ladder are often forced to use rental income on a spare room to convince lenders that they will be able to repay the hefty mortgage they need to buy property.

Homeowners who let a room on their main residence are granted a tax exemption on rental income of up to €7,620 per annum.

This effectively saves a 42 per cent taxpayer €3,200 a year and a 20 per cent taxpayer €1,524 a year, which might sweeten the inconvenience of having to share their starter home with a stranger.

Rent relief

For those on the other side of the property fence, tax relief on rent paid is granted at the standard rate up to a maximum of €254 for a single person under 55 and €508 for a single person over 55. The maximum amount of relief due to a widowed person or a married couple is double these limits.

The relief can be claimed by filling out form RENT 1.

Different rules apply to tenants who pay rent to landlords who are not resident in Ireland. Tenants who pay rent directly to a non-resident landlord, and not through an agency, are obliged to deduct tax at the standard rate from the rent.

For example, on gross rent of €1,000 a month, after 20 per cent tax has been deducted, the rent payable is €800. If tenants do not deduct the tax, they are liable for tax on the amount that should have been deducted.

Tax in year of marriage

It is a good idea for newly married couples to notify the Revenue of their wedding. In the year of marriage, both partners continue to be treated as two single persons.

But if it turns out that the tax the couple paid was greater than the tax that would have been payable as a married couple, they can claim a refund of the difference for the proportion of the year for which they were married.

So if they married in May, the refund would be 7/12ths of the difference.

But marital status won't make too much difference to a couple's combined income tax bill, unless one person earns less than the standard rate cut-off point of €28,000 and the other person earns more than €28,000 and pays tax at 42 per cent.

Part of the standard rate allowance unused by the lower earner can be transferred to the higher earner, cutting the overall liability.

TaxSaver commuter tickets

Unfavourable changes were made earlier this year to the tax treatment of company cars, but employees willing to step out from behind their own private wheel can still find tax-efficiency in the public transport system.

Employees can save up to 48 per cent of their travel costs as a result of tax and PRSI savings if they convince their employer to pay for a TaxSaver Commuter Ticket from Dublin Bus and Iarnród Éireann, either as part of their basic salary or as a bonus.

Employers can achieve PRSI savings of up to 10.75 per cent through the scheme.

For example, an annual bus and rail short hop ticket costs €850. A 42 per cent tax saving plus a 6 per cent PRSI saving results in saved tax of €408 for the employee.

A person who pays tax at the standard rate only will save €221 in tax.