How your income tax is calculated

Nearly all income is taxable, also known as being liable to tax. Tax is charged as a percentage of your income, which is called the rate of tax.

However, there are income tax reliefs that reduce the amount of tax you have to pay.

This page explains how tax rates and tax reliefs are used to calculate the tax you pay.

What is PAYE?

Tax on income that you earn from employment is deducted from your wages by your employer on behalf of Revenue. This is known as Pay As You Earn (PAYE).

What is USC?

The Universal Social Charge (USC) is another tax on your income. It is charged on your gross income. Gross income is the total amount of your income before deductions such as pension contributions or PRSI are taken out.

Unlike income tax, USC is not reduced by tax reliefs (except for certain capital allowances). Find out more about the Universal Social Charge.

Income that is assessed for tax

Under the PAYE system, income tax is charged on:

• Wages
• Fees
• Pensions
• Most types of interest
• Perks
• Profits

Tax is payable on earnings of all kinds from your employment (including for example, bonuses, overtime, non-cash pay or benefit-in-kind).

Money you get that is not liable to income tax may be liable to other taxes.

If you get gifts or inheritances, you may have to pay Capital Acquisitions Tax. If you sell assets such as property or shares you may have to pay Capital Gains Tax.

Budget 2025: Increase in standard rate cut-off point

The standard rate income tax band (the amount you can earn before you start to pay the higher rate of tax) will be increased in 2025 by €2,000 to €44,000 for a single person, with proportionate increases for married couples. 

Tax is charged as a percentage of your income. The percentage that you pay depends on your income.

The first part of your income, up to a certain amount, is taxed at 20%. This is known as the standard rate of tax and the amount that it applies to is known as the standard rate tax band.

The rest of your income is taxed at the higher rate of tax, 40%.

The amount that you can earn before you start to pay the higher rate of tax is known as your standard rate cut-off point. You can see examples of how to calculate income tax using these tax rates and the standard rate cut-off point.

If you are married or in a civil partnership, it may affect your tax bands and tax reliefs. Read more about taxation of married people and civil partners.

Example of standard rate cut-off point for a married couple or civil partners with two incomes

In 2024, the standard rate cut-off point for a married couple or civil partners is €51,000. If both are working, this amount is increased by the lower of:

• The income of the lower earner
• €33,000

This means that one person can have a cut-off point of up to €51,000 and the other person can have a cut-off point of up to €33,000.

Take an example where one person is earning €55,000 and their spouse is earning €35,000.

The standard rate cut-off point for the couple is €51,000 plus an increase of €33,000.

The increase in the standard rate band is not transferable between spouses, so the tax bands for 2024 would be:

• €51,000 @ 20% (= €10,200) and €4,000 @ 40% (= €1,600) for the first spouse
• €33,000 @ 20% (= €6,600) and €2,000 @ 40% (= €800) for the second spouse

Tax credits reduce the amount of tax that you have to pay. After your tax has been calculated, the amount of the tax credit is deducted from the tax you owe. This means that a tax credit has the same value whether you pay the standard or higher rate of tax.

You may be entitled to various tax credits depending on your personal circumstances. You can get more information about the different types of tax credits and reliefs and the tax reliefs available for people with disabilities.

Tax allowances reduce the amount of tax you must pay. The amount by which a tax allowance will reduce your tax depends on what your highest rate of tax is.

This is because the allowance is subtracted from your income before it is taxed. In effect, it is ‘taken off the top’ of your income. The remainder of your income is then taxed at the standard rate and, for any amount over the standard rate cut-off, the higher rate of tax.

If, for example, you have a tax allowance of €200 and the highest rate of income tax you pay is 20%, the amount of your income that is taxed at 20% is reduced by €200. So your tax is reduced by €40 (€200 x 20%).

If you have the same tax allowance of €200 but the highest rate of tax that you pay is 40%, then the amount of your income that is taxed at 40% is reduced by €200. So your tax reduction is €80 (€200 x 40%).

This is known as tax allowance at the marginal rate.

Allowances at the marginal rate include:

• Tax relief on pension contributions
• Tax relief on nursing home expenses
• Tax relief on employing a carer for an incapacitated person
• Seafarer's Allowance

When your employer is calculating your income tax, marginal-rate allowances are applied by raising your standard rate cut-off point, which reduces the amount of income taxed at the higher rate.

By following these steps, you can calculate your income tax, taking into account deductions, tax rates, tax credits, and any marginal rate allowances that may apply.

Step 1: Determine your taxable income

Subtract the following from your total income to get your taxable income:

• Pension contributions
• Salary used for a Travel Pass Scheme or Bike to Work Scheme
• Payments to a Permanent Health Benefit Scheme (to a maximum of 10% of income).

Step 2: Consider the marginal rate allowance

If you have any tax allowances at the marginal rate, you can calculate their effect by deducting them from your taxable pay before calculating the percentages.

The way that your employer may apply marginal-rate allowances is by adjusting your standard rate cut-off point.

Step 3: Calculate the rate of tax

Your taxable income is taxed at:

• 20% of your income below the standard rate cut-off point
• 40% of your income over the standard rate cut-off point

Add these two together to get the gross tax.

Step 4: Subtract tax credits

Subtract the value of your tax credits from your gross tax to get the amount of tax that you have to pay.

Your standard rate cut-off point is shown in your tax credit certificate, which you can view in myAccount. The standard rate cut-off point may vary according to your personal circumstances.

Increased cut-off point

Your standard rate cut-off point may be raised to reduce the amount of tax you pay at the higher rate, for example, if you have marginal-rate tax allowances.

Marginal-rate tax allowances reduce the amount of tax you pay:

• At the standard rate, by increasing your tax credits by the amount of the relief at 20% (the standard rate)
• At the higher rate, by increasing the standard rate cut-off point to reduce the amount of income taxed at the 40% higher rate

Example

A marginal-rate tax allowance of €1,000 would reduce your tax by:

• €200 if you pay income tax at the standard rate of 20%
• €400 if you also pay income tax at the higher rate of 40%

Your standard rate tax credits are increased by €200 (€1,000 x 20% standard rate). This is the amount of the benefit if you pay tax at the standard rate.

If you also pay tax at the higher rate, the higher rate of relief is applied by increasing the standard rate cut-off point by €1,000. This means that €1,000 which would otherwise be taxed at a rate of 40% is instead taxed at 20%, a saving of €200 (€400 – 200). This is in addition to the €200 saved by the increase in tax credits, giving a total of €400.

This increase in the standard rate cut-off point has no effect if you pay tax only at the standard rate, so you would only benefit from the increased tax credits of €200.

Decreased cut-off point

Your standard rate cut-off point may be lowered in order to increase the amount of your income taxed at the higher rate. This could happen, for example, if most of your income is from your employer but you also have other sources of income from which tax has not been deducted. By lowering the cut-off point, the other income is taken into account in your employment deductions.

Benefits in kind and non-PAYE income increase the amount of tax you pay by:

• Decreasing tax credits by 20% of the amount of the income (the standard rate) and
• Decreasing the standard rate cut-off point by the amount of the income

This has the opposite effect to the example above. For example, for €1,000 this would:

• Decrease the tax credits by €200 (€1,000 x 20%), affecting both standard and higher rate taxpayers and
• Decrease the standard rate cut-off point by €1,000, increasing the tax liability for higher rate taxpayers only. The effect of this is that €1,000 would be taxed at 40% instead of 20%, an increase of €200.

Your tax credit certificate shows the rate of tax that applies to your income and the tax credits you are entitled to. You can view, print or download your tax credit certificate through myAccount.

At the start of the tax year, Revenue will automatically issue you a new tax credit certificate. Employers are given a Revenue Payroll Notification (RPN), so they can deduct the correct amount of tax. If your circumstances change during the year, Revenue will update your tax credit certificate and RPN.

Your tax credit certificate and RPN tells your employer whether to calculate the tax you owe using:

• Cumulative basis
• Week 1 basis
• Temporary basis or emergency tax

We explain each below.

Cumulative basis

Most people are taxed on a cumulative basis which makes sure that your tax and USC liability is spread out evenly over the year. Under the cumulative basis, your tax liability is calculated based on your total income from the start of the tax year.

If a tax credit or standard rate cut off point (or both) are not used in full in a pay period, the unused amount can be carried forward and used in the next pay period within that tax year.

Week 1 basis

In certain cases Revenue may tell the employer to deduct tax on a week 1 (people paid weekly) or month 1 basis (people paid monthly). This is sometimes called the ‘non-cumulative basis’.

It means that the pay for each period is dealt with on its own, separate from previous weeks or months. Your employer will deduct income tax from your pay on a week-to-week basis.

Your yearly tax credits and cut off points are not backdated to 1 January and do not accumulate for each pay period. This means you could be overpaying tax.

Revenue has information on how and why you may be taxed on a week 1 basis.

Temporary basis

You may be taxed on a temporary basis called emergency tax if you are changing job or starting work for the first time. You can check Revenue’s current emergency tax and USC rates (pdf). To avoid paying emergency tax you should register the details of the new job with Revenue's Jobs and Pensions online service in myAccount. You can get more information about tax and starting work or changing job.

Income that may be exempt from tax includes the following:

• Payments to approved pension schemes
• Statutory redundancy payments
• Certain social welfare payments
• Scholarship income
• Interest from savings certificates and Savings Bonds and National Instalment Savings Schemes, within limits
• Certain earnings by artists
• Certain payments in respect of disabilities linked with Thalidomide
• Wins from licensed lotteries
• Certain army pensions and allowances
• Payments made by the Health Service Executive to foster parents for the care of foster children
• Some compensation payments under employment law
• Compensation for personal injury that prevents an individual from maintaining themselves. Income arising from the investment of such a payment is also exempt if it is the main source of income, apart from Invalidity Pension for the injury.

If you are on low pay, you may not be liable to pay any tax because your tax credits and reliefs are more than or equal to the amount of tax you are due to pay.

You are completely exempt from income tax if you are over 65 and your income is below certain limits. Revenue provides information on Tax Exemption and Marginal Relief which details available exemption limits and tax relief. If your income is over the limit, then you may benefit from marginal relief.

Contact Revenue’s PAYE jobs and pensions helpline.

You can also make an enquiry or view and update your tax details online using Revenue’s myAccount service.