THIS week marks the introduction of the income tax changes contained in Budget 2011. Small businesses will have to make significant alterations to their payroll systems.
The changes may come as a shock to some employees and the Revenue Commissioners have asked for employers to assist them in explaining the changes to employees.
To begin with, tax credits have been reduced: the single person's credit is now €1,650 and the married person's credit is €3,300.
The PAYE credit has also been reduced to €1,650. Similarly, the standard rate cut-off points have been reduced to €32,800 for a single person and €41,800 for a married couple with one income. Prior to this year, PRSI was not charged on earnings above €75,036. This ceiling has been removed.
From January 1, 2011, the Income and Health Levies have been abolished and replaced with the Universal Social Charge (USC). Employees earning less than €4,004 per annum (€77 per week) are exempt from the charge.
Otherwise, for annual income up to €10,036, a rate of 2pc applies; from €10,036 to €16,016, a rate of 4pc applies; and for income over €16,016, the rate is 7pc.
So, what is the net result? As examples, a single employee on €35,000 per annum will pay an additional €500 in taxes and a married couple receiving one income of €60,000 per annum will pay an additional €1,000.
Some employees will pay an effective rate of tax of 52pc on every cent earned over €32,800.
But it does not end there. From this year, where an employer pays an employee's subscription to a professional organisation, the employee will be taxed on the amount paid.
This will impact the professional and financial services sectors where membership of such organisations is a prerequisite to working.
In certain professions, annual subscriptions can be around €4,000. So, without any apparent change in income, an employee could face an additional €2,000 increase in taxes.
Similarly, prior to the Budget, employers could provide childcare for their employees tax free. Now, employees will be subject to tax on the notional value of the childcare received.
Another significant change is that employees will no longer enjoy relief from PRSI and the USC on pension contributions.
Also, where employees receive shares under Revenue approved share schemes, they will be liable to PRSI and the USC on the value of the shares.
Small businesses will have to incorporate these changes into their payroll calculations.
All major payroll software packages will have updates that take account of the Budget 2011 changes.
If your business does not use payroll software, you might consider engaging the services of a bookkeeper to process payroll and VAT.
Bookkeepers are usually reasonably priced and allow you to focus on other aspects of your business that you might be better at.
These changes will reduce employees' take-home pay and that may undermine staff morale.
One way to manage this is by providing employees with information -- a Revenue guide can be found by visiting www.revenue.ie and clicking "Budget Information".
Paul Brady is a Registered Tax Consultant and founder of TaxandLegal.ie