When marginal relief means you pay less tax

Alternative assessment makes sense if just above income exemption threshold

 

I am a retired teacher and will be 65 this year with a pension that is below the ¤36,000 threshold, which is the criteria for exemption of Dirt on interest earned from savings. I act as an official at election times and am paid by returning officer. This is irregular and is subject to the various deductions that apply, such as income tax, USC and Pension Related Reduction. Total earnings still fall below the ¤36,000.

However, if the interest my wife and I earn from our savings is included as additional earnings, I exceed the threshold by a few thousand euro. Is interest earned added to one’s annual pension to arrive at the cut-off point?

You mentioned that “marginal relief” is available if the income is above the threshold. I am unclear as to how this applies. Perhaps you could explain this to me.

Should I wait until year-end and make a return seeking a repayment of the Dirt or can I apply for exemption at any time during the year.

Mr V McG , Dublin


Although Deposit Interest Retention Tax is deemed to be the only tax liable on deposit interest, the interest earned on your bank deposits does have to be taken into account when assessing your eligibility for income tax exemption.

If, as you say, it only brings you slightly over the threshold, you can examine whether you would be better off applying for marginal relief or just paying the income tax due in the normal course of events (not including income tax obviously on the deposit interest).

Essentially, it is possible to avail of marginal relief if your income is above the income exemptions threshold but less than two times the threshold.

The key things about it is that it is assessed at a flat rate of 40 per cent and that it makes no allowance for tax credits. That’s why you might well find yourself better off on the standard method of tax assessment.

In terms of working out the either/or of marginal relief, the Revenue Commissioners provide a very useful worked example.

Let’s say you are a married man, aged 68, and with income of ¤38,000 (¤730.77 per week). You would be entitled this year to a total tax credit of ¤5,440. The exemption limit is ¤36,000.

If you taxed under the normal system, you would pay ¤7,600 income tax on income of ¤38,000, minus your tax credit of ¤5,440, which would give you a final tax bill of ¤2,160.

If you were to opt for marginal relief, you would pay tax at 40 per cent on the difference between the exemption threshold and your income. In this case that is ¤2,000 (¤38,000 minus ¤36,000). The tax bill on ¤2,000 would be ¤800.

As you can see, in this example, you would be better off claiming marginal relief than availing of tax credits and opting for the more traditional approach.

You can use the example above to work out your own personal position. Obviously, if you have dependent children, you would increase your income tax exemption threshold by the relevant figure per child (¤575 for each of the first two children and then ¤830 per child thereafter).

Assuming it is more beneficial to you, how do you go about claiming? You contact your regional tax office. If you are in Dublin, as you are, the number is 1890-333425. For those living in the east and southeast (Carlow, Kildare, Kilkenny, Laois, Meath, Tipperary, Waterford, Wexford and Wicklow ), the number is 1890-444425. If you’re in Clare, Limerick, Cork & Kerry, you should call 1890-222425 and in the Border, Midlands West region (Cavan, Monaghan, Donegal, Mayo, Galway, Leitrim, Longford, Louth, Offaly, Roscommon, Sligo and Westmeath), the relevant number is 1890-777425.

Once the tax authorities confirm it is in your interests, they should issue your pension provider with a new tax credit certificate.

Bear in mind also that you can claim relief not only for this year, but for the four years prior to this tax year, assuming it would be to your benefit.

If you are granted marginal relief and then find yourself entitled to new tax credits or reliefs, such as for health expenses, Revenue will recalculate your position to see if marginal relief is still more beneficial than claiming tax credits/reliefs.

In relation to Dirt, if you are over the income threshold, you will not be entitled to a refund. If, however, you are below the threshold, and know you will be, you can apply for interest to be paid free of Dirt at any point. In your case,when the position might change from year to year, it might be as well to wait for the year end to claim relief on Dirt.


This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.