TODAY'S crisis Budget is expected to see the income levy hiked sharply. It will be increased now because the Government needs additional tax revenue quickly, and it would take at least two months to alter tax rates, tax bands and credits, according to tax partner Ciaran Medlar, of BDO Simpson Xavier.

This is because every taxpayer, and employer, in the country has to be issued with new tax certs when there are changes to rates and credits.

But the hike in the income levy is only expected to be a temporary measure with the Government likely to signal that it will raise tax rates and/or alter tax credits with this to take effect from the start of next year. So how does the levy work, and can you escape it?

Currently, a 1pc levy applies on income between €18,304 a year up to €100,100. Income between €100,100 and €250,120 is levied at 2pc. Income over €250,120 is levied at 3pc.

It is a fair bet that the 1pc income levy will become 2pc, the 2pc levy could become 3pc or higher. These is also likely to be even more income thresholds.

For example, we could end up with the 1pc applying to income between €18,304 and €50,000, then 2pc applying on income between €50,000 and €70,000 etc. The income levy would seem to be a neat solution as far as the minister and his mandarins are concerned, as it impacts on total income, irrespective of the taxpayer's income status.

At the moment anyone who earns more than €18,304 a year pays the income levy. This exemption limit increases to €20,000 per year if you are 65 or over, and double this for a couple.

Once your income goes over the minimum threshold, the levy applies to the full amount of your income, not just the portion that exceeds the threshold. So for example, if your gross salary for 2009 is €25,000, the levy will apply to the full €25,000, and not just to €6,696 (€25,000 minus €18,304).

The income levy is based on your gross income before any deductions for pension contributions, losses, capital allowances or tax credits.

It applies to notional pay and the likes of bonus payments and benefits-in-kind.

But there are a range of exemptions:

Savings

The levy does not apply to interest from bank, building societies and credit union accounts where deposit interest retention tax (DIRT) has been applied.

Interest on savings certificates is exempt, as are bonuses or interest paid under instalment savings schemes, both of which are sold by An Post.

Savings certificates pay interest that works out at 3.53pc on an annualised basis, but you have to lock up your money for five years and six months.

There is no DIRT tax on this product.

With instalment savings you save for a year and then leave that money on deposit for five years and get what works out at 3.37pc a year. Again, DIRT does not apply.

Redundancy payments

Statutory redundancy payments are exempt from the levy.

These payments amount to two weeks pay per year of services, plus a bonus week up to a maximum of €600 per week.

Also, payments over the statutory minimum are exempt from the income levy up to certain limits.

These limits are up to €10,160 plus €765 per complete year of service, over the statutory minimum.

But the limit can be raised by €10,000 if the person is not a member of an occupational pension scheme.

In addition, tax relief known as the standard capital superannuation benefit (SCSB) can be taken into account for the purposes of calculating the income levy. SCSB relief can substantially reduce the amount of redundancy payment liable to income tax, particularly for long-serving employees with high earnings.

Social welfare payments

Social welfare benefits are exempt from the levy.

These payments include child benefit (€166 per month for the first two children) and the early child supplement (worth €996 per child under five, per year).

Medical card holders

The levy does not apply to people who have a full medical card, but not a GP-only medical card. You do not have to hold a full medical card for a full year to qualify for the exemption, according to the Revenue Commissioners.

Even if the full card is issued in December, you are entitled to the exemption for the previous 11 months.

Other exemptions

Those aged over 65 earning less than €20,000 a year are exempt, while earnings from profit-sharing and save-as-you-earn schemes are exempt. Income from the rent-a-room scheme (up to €10,000 a year) is also exempt.

• See the Revenue Commission's 'Income Levy -- Frequently Asked Questions' on www.revenue.ie.