What is the truth about paying tax in Ireland?

The State is often seen as comparing poorly on personal tax rates – but is this an accurate view?

In the ephemeral festive glow of the coming weeks, family and friends returning home for the Christmas holidays from lives abroad will at some stage face the perennial question: “Would you ever think of coming back?”

A stock answer of our loved ones based overseas is that they would think about doing so, except for the weather and the tax.

Climate change and personal preferences aside, there is not much to be said on the (predominantly southwesterly and wet) weather front. But does Ireland compare so poorly to neighbouring nations and further afield when it comes to how deeply the government delves into our pay packets?

Well, it depends on how much you earn mostly.


The more you earn, the more you pay

The Republic is a "highly progressive" tax nation. So says the Irish Tax Institute (ITI), the 50-year-old representative body for chartered tax advisers here. In layman's terms, that means the more money you make, you more tax you pay.

As salary levels rise, the State quickly moves up the international income tax league table

The Organisation for Economic Co-operation and Development agrees. It cites the State as the second most progressive for income tax among its 36 member countries, and the most progressive among its EU members.

For many years, the ITI has been comparing how much tax average workers pay here compared with seven other countries: the UK, the US, Germany, France, Sweden, Singapore and Switzerland.

It has picked these countries for comparison because they, too, are exporting open economies and compete with the State for inward investment.

In its latest analysis, it found that the State has the second-lowest effective personal tax rate among all eight countries for workers on lower salaries. But as salary levels rise, the State quickly moves up the international income tax league table.

So, for example, someone earning €25,000 a year would have to sacrifice €3,148 of it towards income tax and social security (PRSI) for the privilege of living here. That is the second-lowest effective tax rate after Switzerland (€2,567) among the eight countries for that lower salary level.

The US (€3,434) and the UK (€4,054) are higher up the table, while workers in Germany – which tops the table at €7,535 – have to pay more than twice the rate of their €25,000-a-year-earning counterparts in Ireland.

A much greater proportion of the tax in the likes of Germany and France would be down to social security payments, something which is included in the calculations.

It should be noted at this stage that the comparisons are all based on an unmarried person who pays tax as an employee (PAYE in Ireland), and do not take account of the almost infinite variables of personal circumstances – more on which later.

Ireland starts to look less attractive at moderate salaries and above

When comparing personal tax paid by workers on a salary of €48,000, the State (at €12,243) leaps up the league table from second lowest to fourth highest. The UK (€11,416) and the US (€8,147), which drops to the bottom of the table, fare more favourably.

Top-of-the-table Germany (€18,363) remains significantly ahead, followed by France (€14,828) and Sweden (€12,249), which takes just €6 more than the Republic.

At salaries of €55,000 and €75,000, the State remains as fourth most expensive for income tax. For this bracket, it is just above the UK, where you would have €2,000-€3,000 more in your pocket a year.

The difference becomes much more pronounced with the US, where those on the same salaries would have between €5,000 and €10,000 more a year to spend or squirrel away.

When pay breaches the €100,000 barrier, the State moves up the table again to third highest. Earners on €100,000 here will have to give €38,511 over to the public purse, compared with €32,479 in the UK and a significantly less €23,845 in the US.

If you fancy moving to Singapore, you would be foregoing just €16,377 on your €100,000 salary.

Similar scales apply for those on salaries of more than €150,000. In the Republic, you’ll contribute €64,511 of it to the exchequer – more than €5,000 more than you would in the UK and an eye-watering €27,000 more than in the US.

Part of the reason for the big jump in tax for higher earners in Ireland is the Universal Social Charge, which rises to 8 per cent on incomes of more than €70,044.

As a rule of thumb, Irish taxpayers pay income tax of 48.5 per cent on salaries in excess of €35,300 and 52 per cent for earnings in excess of €70,044.

Broadly speaking, you’ll pay much more tax in league-topping Germany, a bit less in mid-ranking UK and considerably less in bottom-of-the-table US.

But if you are still dewey-eyed by the home fire (might as well break it to you now – we’re transitioning away from turf), and weighing up the financial pros and cons of moving back to Ireland – or if you’re mulling a move from here to somewhere less expensive and less wet – there is, of course, much more to factor in.

Are these calculations an accurate comparison?

Looking at tax alone, the ITI calculations are very simplistic.

They don’t take account of married couples, for example, who can be assessed for tax liability in different ways in different countries. In the Republic, married couples – who can be assessed jointly, separately or as singles – can pay significantly less tax than if they were unmarried.

The State has a property tax, but unlike many other countries there are, for now, no water charges

They can also share tax credits to further reduce their bill. Tax credits are another variable very particular to individual circumstances and difficult to compare generally with similar incentives abroad.

There are tax credits for first-time homebuyers, mortgage payers, anyone renovating their home, health expenses, home carers, tuition fees, pension payments, retirees, charitable donations and business start-ups, among other things. These will all reduce your tax bill.

State benefits, some of which are universal and not means tested, are another factor. Child benefit, for example, is paid to parents irrespective of their earnings at €140 per child on the first Tuesday of every month.

In some cases, Irish families may receive more money from the State than they pay in tax.

Is it all about personal tax?

There are other levies to consider. Like most countries, the State has a property tax, but unlike many other countries there are, for now, no water charges.

And what does it cost to live? Rent, house prices, mortgage rates, utilities, services, groceries, running a car. Throw in VAT. There is also the cost of health insurance and education to consider. Some of these costs compare favourably with other countries, some do not.

"It is very difficult to compare one country with another," accepts Anne Gunnell, director of tax policy at the ITI.

“There are so many factors involved. You can look at tax in isolation but there is a lot of other economic and fiscal issues to take into consideration.

“But what our comparisons demonstrate is that the Irish tax system is a very progressive personal tax system. When you are earning lower salary levels, there is a lower tax burden, compared to the other countries.

“They also demonstrate that, very quickly, Ireland moves up the rank in terms of a higher tax burden on higher salary levels. The reason for that is that employees in Ireland hit that higher tax rate – moving into the 40 per cent versus the 20 per cent.

“The higher tax rate kicks in much quicker, at an earlier stage, at a more modest salary.”

Anecdotally, Gunnell says, there is evidence among some industries and sectors in the State that they find it difficult to compete with other countries “in attracting certain people back, if they are on particular salary levels, because they would be paying the higher tax rate at much lower levels of earnings than [in] other countries”.

But she adds that everyone’s own circumstances are key to working out their own financial comparison between living in Ireland and elsewhere.

“There are so many variables at play that each individual person or couple or family would need to assess all of their particular circumstances,” she says.

“Tax is just one issue.”

And that is before you take account of personal motivations. Someone might just want to come home. Or you might want to live somewhere sunnier. Such motivations can very quickly overcome base financial reasoning.