Q&A

Dominic Coyleanswers your questions.

Marginal issues

I don't understand some of the figures that appear on my tax assessment notice. We are a married couple, both on a pension, and jointly assessed. How is the marginal exemption relief figure appearing in panel five and deductible from the tax on income computed?

What increases the upper limit of the lower tax band rate?

Retention tax credit for Dirt withheld from deposit income is less than the tax levied on that income at the high rate of tax. I have read in a financial guide that income subjected to Dirt is not liable to further tax. Is that correct?

Mr M.M., Dublin

Just to get it out of the way, I am going to answer the last part of your question first. It is correct that Deposit Interest Retention Tax (Dirt), levied at source, is payment in full on any liability arising from interest income. This is true even if your income is generally taxed at the higher marginal rate.

Turning to the gist of your question, marginal exemption relief is an area that always befuddles me and I consistently find myself having to return to the Revenue, which has a very helpful leaflet on the subject - IT8 - Tax Exemption and Marginal Relief.

The first thing to note is that everyone is subject to an income exemption limit. In 2007, for individuals under the age of 65, the exemption is €5,210, a figure that is doubled to €10,420 in the case of jointly assessed married couples.

For pensioners, such as yourselves, the corresponding thresholds are €19,000 for a single person and €38,000 for a married couple.

In general, income above that level is taxed at 20 per cent - or 41 per cent if the income exceeds €68,000 in the case of married pensioners.

However, if your income is not far over the threshold, there is still a possibility of receiving some relief. Essentially, you can either avail of tax credits or your income tax exemption.

The added twist is that an income tax rate of 40 per cent applies to income taxed under marginal relief. Effectively, that means you need to do the sums to see which system you are better off under.

Assuming you are a married man of 68 with no dependent children with income of €40,000, under the normal regime, you would be entitled to a married personal credit of €3,260, an age tax credit of €500 and a PAYE tax credit of €1,490. In total, your tax credits come to €5,250.

Your €40,000 income is first taxed in the normal way at 20 per cent, yielding a tax liability of €8,000. From this is deducted your tax credits - €5,250 - leaving you with a tax liability of €2,750.

Under marginal relief, your income tax exemption of €34,000 is first deducted from your income of €40,000. The balance - in this case, €6,000 - is then taxed at 40 per cent, giving you a tax liability of €2,400. In the case of the figures used in this example, you will be better off opting for the marginal exemption relief - notwithstanding the higher tax rate applicable of 40 per cent.

You also ask which factors can increase the upper limit of the low tax band rate.

In the first place, you need to look at what will increase the base exemption threshold - children. The limit is raised by €575 for each of the first two dependent children - and that word "dependent" is the key one. Any third or subsequent dependent child sees the income exemption limit rise by a further €830 per individual.

The standard rate tax band threshold is also raised on occasion. For instance, while you must declare the income on which Dirt has been levied, you will find that the standard rate band limit has also been raised to take account of this and ensure that you pay no further tax on such deposit interest income.

Other factors that can raise this band limit are where a married couple with one income suddenly become a married family with two incomes, or in the case of people receiving a one-parent family credit.

Normally, Revenue will automatically apply marginal relief where appropriate - generally only to those over 65. If in doubt, contact your tax office.

Once allowed, you will need to contact the Revenue if you are looking to claim additional tax credits - for instance in respect of service charges or health expenses. In such cases, the Revenue will crunch the numbers again to confirm whether marginal relief is still more beneficial to you than the normal system of taxation.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irish-times.ie.

This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper.