WE all know that heftier taxes have made our pay packets a lot slimmer since the start of the year. Yet many of us don't realise that we are also paying higher taxes on any precious money made on investments.
Indeed, since the new universal charge was introduced last January, the taxman can now grab more than half of the money you make on certain investments.
UP TO 55% TAX
If you own shares that pay dividends, don't get too excited about any dividend windfall coming your way. You could pay as much as 55 per cent tax on your dividends, according to Niall Glynn, tax partner with Deloitte.
If you are self-employed and earning more than €100,000 for example, you must pay 41 per cent income tax on dividends -- as well as a 10 per cent universal social charge and four per cent PRSI, says Mr Glynn. That adds up to a total tax bill of 55 per cent.
If you're a PAYE employee on the higher rate of income tax, you could lose up to 48 per cent of your dividends to tax. PAYE workers don't usually have to pay PRSI on dividends -- but they must pay 41 per cent income tax (if on the higher tax rate) as well as a universal social charge of up to seven per cent.
The highest universal social charge for self-employed people is 10 per cent -- and that charge applies on earnings over €100,000. The highest universal social charge for PAYE workers is seven per cent -- however, if you're a PAYE worker and you earn more than €100,000 from investments, the 10 per cent universal social charge kicks in.
"For example, if you had €200,000 of PAYE income and €110,000 worth of dividends, €10,000 of the dividend income would be liable to the universal social charge of 10 per cent," said Mr Glynn.
If you're a PAYE employee on the standard 20 per cent rate of income tax, you'll only lose up to 27 per cent of your dividends to tax. That includes income tax of 20 per cent and a universal social charge of up to seven per cent.
As well as the dividends that you may earn on shares, you could make a profit when you sell those shares -- or indeed, a hefty loss. If you make a profit when you sell shares, capital gains tax will gobble up a quarter of that profit.
Capital gains tax of 25 per cent is usually paid on profits made when you sell any capital investment, such as shares or property, for more than what you initially bought it for. If, however, you make a loss when you sell your shares, you can usually write off that loss against other capital gains -- allowing you to reduce your total capital gains tax bill.
If your employer offered you a share option scheme, you may have been entitled to a lighter tax bill on profits earned on your shares if the Revenue Commissioners approved the scheme. However, be warned -- since the four-year plan kicked in last November, approved share-option schemes have been abolished.
"All share-option schemes are now unapproved," said a spokeswoman for Revenue. So, chances are you will face a higher tax bill than you expected if you make any money from your share options.
UP TO 55% TAX
Any investment that generates income can be hit with a tax bill of up to 55 per cent. Like dividends, that tax bill includes income tax, the universal social charge -- and PRSI if the holder of the investment is self-employed.
"Investments which generate income include rental property and equity portfolios," said Mr Glynn.
"So if you have a rental property, you could have to pay up to 55 per cent tax on the rental income. Similarly, if you have an equity portfolio with a mixture of stocks and bonds -- and if that portfolio generates income, you could have to pay up to 55 per cent tax on the income."
If you're a PAYE worker, you'll either pay 27 per cent or 48 per cent tax on your rental income, depending on whether you pay the lower or higher rate of income tax.
UP TO 55% TAX
If you invested in corporate bonds or Irish government bonds, you must pay income tax on any coupon (interest paid on your bond) you earn.
The tax bill on the coupon includes your income tax, the universal social charge -- and PRSI if you're self-employed, according to Mr Glynn. So, you could pay up to 55 per cent tax on bond coupons if self-employed, or up to 48 per cent tax if a PAYE worker.
If you own corporate bonds, you must also pay capital gains tax if you make money when you sell those bonds. You don't have to pay capital gains tax, however, if you make a profit when selling Irish government bonds.
If you invested in the Government's National Solidarity Bond, you don't pay income tax on the annual interest earned on that bond. The National Solidarity Bond is effectively treated like a deposit account -- so you pay 27 per cent DIRT on the interest earned on your bond. If you earn a bonus after holding the National Solidarity Bond for five, seven or 10 years, you don't pay tax on the bonus, according to the Revenue Commissioners.
One way to avoid losing more than half of your investment returns to tax is to put your money into a structured investment product. By doing so, you could restrict your tax bill to 30 per cent.
"Where you are investing for the long-term, the general principle with equity investments is that two-thirds of your return is usually generated by income yield (money earned on your investment each year) and one-third by capital return," said Mr Glynn. "If you are paying tax at 55 per cent on your income yield, however, you are losing a lot of that income to tax.
"As a result, a lot of people are investing through life policies, often referred to as 'life wrappers' -- where the effective tax rate when you cash in your policy is 30 per cent exit tax."
Be careful when putting your money into a structured product or managed fund, however -- and get tax advice. The exit tax on some products, such as certain offshore funds, is 50 per cent -- rather than 30 per cent.
"If you have a personal portfolio life policy, where you choose the underlying investments in the policy, the tax rate is 50 per cent," added Mr Glynn. "If you have a policy where an investment manager chooses the underlying investments, the tax rate is 30 per cent."
UP TO 31% TAX
Most of us pay 27 per cent DIRT on the interest earned on savings. However, if you are self-employed, you must pay four per cent PRSI on your savings interest as well.
"Even for a simple deposit account, tax treatment is not straightforward," said Mr Glynn. "If you are a PAYE employee, you don't pay PRSI on savings interest. But if you are self-employed, you have to pay PRSI of four per cent on the savings interest as well as DIRT of 27 per cent -- this brings the total tax rate to 31 per cent."
If you have your savings in a tracker bond or a long-term savings product, you could have to pay 30 per cent DIRT on the interest earned, according to Maeve Corr, director of private client services with PricewaterhouseCoopers. A DIRT rate of 30 per cent is charged on deposit accounts where the interest is not calculated at least once a year.
You don't have to pay the universal social charge on the interest earned on Irish or EU savings accounts. However, if you have your savings in an account outside the EU, you must pay the universal social charge, Ms Corr said.
SO WHAT IS TAX-FREE?
If you want to avoid paying DIRT, PRSI or universal social charge on savings interest, you could invest in Post Office savings certificates or savings bonds. But remember that tax should not be your only priority when choosing an investment.
"Tax shouldn't be the tail that wags the investment dog," said Pat McCormack, head of wealth management with Barclays Wealth Ireland.
"The fundamental question should be: is it a good investment or not? Once you are satisfied with the investment, then it is important to explore the most tax-efficient means of investing."