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Monday 15 September 2014

The perfect salary is €75k – if you want to maximise your tax breaks

Published 25/05/2014 | 02:30

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The ideal wage for employees for tax breaks is €75,000.
The ideal wage for employees for tax breaks is €75,000.

THE ideal wage for tax breaks is €75,000 – according to TASC, the Dublin-based Think-Tank for Action on Social Change.

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It calculated the amount of tax that workers would pay if they received no tax breaks and compared this to the amount of tax paid after tax relief kicked in.

It found that tax relief puts more money back into the pockets of high earners than the lower-paid and those on the average wage.

Tax breaks cut the tax bill of an individual earning €35,000 by about 5 per cent. The more an individual earns over €35,000, the more the value of tax relief increases – until the earnings hit €75,000.

Tax breaks chop 10 per cent off the bill faced by a person earning €75,000. The extent to which tax breaks can ease a tax bill starts to fall after that – but not that drastically.

For example, tax relief knocks about 9 per cent off the bill of an individual earning €100,000. However, tax breaks hardly knock anything off the bill of those earning €20,000 or less – if at all.

"The tax-break regime we have in this country is grossly inequitable," said Nat O'Connor, director of TASC.

"It's one of the ways that high earners can get away with paying significantly less income tax than others. One of the most valuable tax breaks is pension tax relief – and most of this relief is paid to the top 20 per cent of earners."

Low-paid workers, such as kitchen porters, customer service reps, cleaners, mailroom clerks and shop cashiers, are being penalised by a bizarre tax anomaly.

Many of those workers earn between €18,305 and €19,365 a year – and once tax and PRSI are paid, their take-home pay is less than those on lesser wages of €18,000 and €18,304, according to TASC.

"While someone on €18,304 pays an effective tax rate of 5.25 per cent, someone who is paid one euro more pays effective tax of 9.25 per cent, due to the onset of PRSI," said O'Connor. "This has the perverse consequence that a person on €18,000 has higher net pay than someone on €19,000 – it punishes low paid workers who are in a situation where they might get a pay rise.

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