Your sly bit on the side comes with a tax bill too
Published 27/07/2014 | 02:30
Earning a bit on the side can be the difference between being able to make ends meet - and not.
However, it can also land you with a nasty tax bill.
There are as many as 50,000 PAYE (Pay-As-You-Earn) workers earning something on the side in this country.
While these workers can rely on their employers to pay tax on the income earned on their normal day job, it is up to the individuals themselves to pay the right tax on anything earned on top of that.
Each year, the Revenue Commissioners sends requests for tax returns to between 40,000 and 50,000 PAYE taxpayers who are earning something on the side.
Many landlords - including the reluctant landlords thrown up by the economic downturn - are among those 50,000 PAYE taxpayers.
Reluctant landlords include those who were forced to rent out their homes because they could not afford the mortgage repayments. They also include those who were in negative equity but moved on - and decided to rent out their home rather than sell at a loss.
Reluctant landlords are often unaware that they have to pay tax on their rental income. In many cases, their rent is just about covering their mortgage (if at all) so they mistakenly believe that they don't have to pay tax.
"You have to pay tax on rental income even though you haven't made a profit in the normal sense," said Pat O'Brien, director of human capital with Ernst & Young.
You could lose almost half of the rent you earn to tax. You pay tax on rental income at your higher rate of income tax and you must also pay the Universal Service Charge (USC).
On top of this, from the start of this year, landlords must pay 4pc PRSI on their rental income.
So if you're a higher-rate taxpayer and a PAYE worker, you will usually have to pay 52pc tax on rental income earned in 2014. This could push your bill for rental income to several thousand a year - a struggle if you are still paying a mortgage on the property you're renting out. Many reluctant landlords fall into this category.
Furthermore, if you only started to rent out your property in 2013, you will be hit with a double whammy this year. The tax for rental income earned in 2013 is not due until the end of October 2014 (or mid-November if filing your tax return online).
However, as this is your first tax return, you must also pay the preliminary tax for 2014 by the same date. That preliminary tax should be 90pc of your estimated tax bill for 2014. In other words, when filing your first tax return, you almost pay twice the tax you would normally pay on your rental income each year.
People can make expensive mistakes when renting out foreign properties, according to Christine Keily, senior tax consultant with Taxback.com. Keily recently came across a case where an individual was hit with a €5,000 tax bill after Revenue discovered that he had rented out a property in Britain. The man had lived in the property until 2008 - when he moved back to Ireland. He then rented the British property for a couple of years before selling it in 2010.
"The rental of the property was only intended as a short-term measure," said Keily. "He didn't think there was any income arising from the property as his monthly mortgage payments were higher than the rents received."
Of course, rent is not the only type of income you can earn on the side - and on which you must pay tax. Once you earn non-PAYE income of €3,174 a year or more (after expenses) or €50,000 or more (before expenses), you usually must file a tax return each year - and pay whatever tax is due.
Even if your non-PAYE income falls below these thresholds, you must let Revenue know that you have earned the money, according to O'Brien.
"You'll still have to pay tax, even if it's a small amount of money," said O'Brien. "It's only the method used to collect the tax that's different. If your non-PAYE income is under the threshold, the Revenue will normally code it in against your tax credits - so you'll pay tax through the normal PAYE system."
As well as part-time employment or nixers, other money earned on the side which you must usually pay tax on includes share dividends and interest earned on savings. In most cases, the tax on savings interest - known as DIRT (Deposit Interest Retention Tax) - is automatically deducted by banks, credit unions and other financial institutions so you usually don't have to make any arrangements to pay this tax. However, you may have to pay 4pc PRSI on the interest earned on savings.
Dividends could catch you out - particularly if they're lucrative. For example, you must pay tax on dividends earned on Irish shares at your higher rate of income tax. As Irish companies must deduct 20pc dividend withholding tax at source from dividends, you will get a credit for the tax already taken out. This could still leave you with a tax bill of a few grand.
"If you're a higher-rate taxpayer who has earned dividend income of €10,000, then tax of €4,100 is due - less a credit of €2,000 for the dividend withholding tax," said John Fagan, managing partner of Fagan & Associates. "So your tax bill is therefore €2,100. You may also have to pay PRSI and the USC."
And what about your private pension - do you have to file a tax return for that once your retire?
"There is no need to file a tax return for a private pension, as it's treated as PAYE," said Fagan.
There are some exceptions, however. "Overseas pensions and foreign pensions are usually paid gross from other countries and if they're in any way substantial, you'll have to file a tax return," said O'Brien.
A tax bill can come as a shock - particularly if you weren't expecting it and will struggle to pay it.
You may be able to strike a deal with Revenue if you anticipate difficulties paying a tax bill. Under such a deal, you would repay the tax bill over time.
Revenue could also code in the tax owed against your tax credits over a number of years. As tax credits ultimately reduce the amount of tax paid on your wages, you can expect a slimmer pay packet if you go down this route.
If you're in any doubt about whether or not you should pay tax on something or file a tax return, check directly with Revenue. Better to be safe than sorry.
How to get a shock tax bill as low as it can go
Faced with a looming tax bill? Don't panic.
Instead, check what you can do to reduce that tax bill - or eliminate it altogether.
There are a number of tax exemptions which you might qualify for. For example, under the rent-a-room scheme, you can earn up to €10,000 tax-free by renting out a room in your home. Childminders taking care of up to three children can earn up to €15,000 a year tax-free - however, once they go over the €15,000 threshold, they must pay tax on their entire earnings.
Landlords can write various expenses off their tax bill on rental income such as house and mortgage protection insurance, and any fee paid to a letting agent to manage or find tenants.
The cost of repairs can also be written off against tax - but you cannot charge for your own labour. Some common repairs which can be written off against tax include damp and rot treatment, the replacement of roof slates, and the mending of broken windows, doors, furniture and machines.
It's important to keep all receipts for any expenses you are writing off against your tax bill for rental income. You must hold these receipts for six years unless Revenue advises otherwise.
Don't write off expenses which don't qualify for tax relief - otherwise, you could pay less tax than you should and you could face steep penalties if found out.
For example, you cannot write off the cost of the full mortgage repayments on the rented property. You can however write off 75pc of your mortgage interest, but this could knock only a tiny fraction off your tax bill -particularly if you have a tracker mortgage and have seen your mortgage interest bill dive in recent years.
You cannot write off the full cost of furniture or electrical appliances which you bought for the property before renting it out. You can however write off an eighth of the cost by claiming a wear and tear allowance each year.
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