In this blog piece, we give you insight into tax credits, how they are allocated, and the other important factors that you should consider.
When you start contracting there can be a lot of new terminologies thrown at you that can be hard to understand and wrap your head around. If you have previously been employed in permanent employment, managing your tax is something that you probably didn't have to think about. As a contractor, you need to be more proactive about this. A helpful place to start is understanding the basics, this means that when you outsource our accounting to a place like Icon Accounting, you feel more empowered in the conversations you have and can have all your questions ready.
What are tax credits?
Legally you are required to pay tax on the income you earn, tax credits are deductions in the amount of tax that you pay. The amount of tax credits you are owed is different depending on your circumstances. Your tax credits are calculated annually and are divided out over the number of times you are paid in a year, for example, if you are paid monthly, they will be divided by 12.
It is important to note that if you don't use your tax credits within the year, they will be lost and cannot be carried from one year to the next.
How are tax credits calculated?
Tax credits are calculated based on several personal factors. The first factor is normally your marital status and accounts for your dependents, this calculates the rate of tax you will pay. From here there is a long list of added tax reliefs and credits that are added to reduce the amount of tax you pay. These rates are revaluated annually so we recommend you keep up to date with any changes. To see the rates for 2022, check out Revenue. Relocating to Ireland
If you are relocating to Ireland for a contract opportunity, the first step is to obtain a PPS number which will act as your tax reference number and essentially be where your tax credits are allocated.
Revenue may not assign any tax credits to you if you are going to be in Ireland for less than 183 days of the calendar year or you may be entitled to claim a percentage of the Tax Credits. For more information on this, please reach out to our team directly for assistance.
Emergency tax
Emergency tax is implemented when you start a new job and have not registered the job with Revenue or provided your PPSN number to your new employer. It is a higher rate of tax and none of your tax credits will be applied, however, once you have supplied this information you will be entitled to a refund. As a contractor, it is important that you make sure that you do this at the start of every new contract, so you do not get surprised with a much lower net pay than expected.
Under the emergency tax, for the first four weeks, you will pay 20% tax until your tax band limit and 40% on the remaining income, but from the fifth week, all income will be taxed at 40%. To learn more about emergency tax we recommend that you contact revenue and stay up to date with new tax developments, this is something that our financial advisors can help with.
Now that you are armed with this information, we suggest you arrange a consultation with one of our expert advisors at to review your income and tax. Contact us here or alternatively email, info@iconaccounting.ie to get in touch.
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