How is my income tax calculated?

I asked my wife last night what area of personal finance does she not understand the most. Her answer was; her payslip. She sees the gross amount coming in, all these deductions and then the net amount at the end but she does not fully understand how the income tax is calculated or all the rates for everything. I am going to run through the three main taxes that you pay on your income.

Income Tax

There are two rates of income tax based on how much you earn:

  1. Standard Rate – 20%
  2. Higher Rate – 40%

For the first €33,800 you earn, the income tax rate is 20%. For anything over that, you pay 40% income tax. If you are a married couple with one income, you pay the 20% rate for up to €42,800. If you both work, you can split the standard rate so one person gets the 20% rate up to €42,800 and the other gets up to €24,800 at 20%.

When you get paid, your income tax is deducted directly from your gross income. If you make pension contributions directly from your salary, the pension contribution is deducted from your salary before the income tax is taken.

Tax Credits

This is usually where people get thrown. A tax credit is an amount of money that is deducted from the gross income tax amount that you have paid.

  1. Single person tax credit – €1,650
  2. Married person tax credit – €3,300
  3. PAYE tax credit – €1,650 (for employees)
  4. Earned Income tax credit – €950 (for the self employed)

Most people get the single person tax credit and the PAYE tax credit, a total of €3,300. So if your income tax is €20,000, after the tax credits are applied, it is reduced to €16,700.


Pay Related Social Insurance. This deduction is supposed to pay for your old age pension, unemployment benefits, sickness benefit etc. In reality, it’s put into the Exchequer and spent. It is not ringfenced for future pensions or unemployment benefits.

  1. Self employed – 4% on all your earnings
  2. PAYE worker- 4% on all your earnings if you earn more than €352 a week. If you earn between €352.01 and €424 a week, you can get a PRSI tax credit for up to €12.

You cannot get PRSI relief on pension contributions ie if you make a pension contribution of €500 a month, you pay PRSI of €20 on that contribution.


The Universal Social Charge replaced both the income levy and the health levy in 2011. This tax was introduced during the recession and so is very unpopular and very politicised. Whenever there is an election, expect plenty of promises to be made about the abolition of the USC. In truth, it is a great earner for the Exchequer, so I can’t see it going. The tax is tiered, so the more you earn, the more you pay.

  1. First €12,012 – 0.5%
  2. Next €6,760 – 2.5%
  3. Next €51,272 – 5%
  4. Balance – 8%
  5. If you are self employed and your income exceeds €100,000, you pay 11% on the amount over €100,000.

Again, you pay USC on pension contributions.

Below, is an example of how your total tax is calculated.

I hope this gives you a better idea of how your taxes are deducted from your salary each month. You should get independent, qualified advice if you want help with your tax returns. I can recommend plenty of very good tax advisors if you do not already have a tax advisor.

As always, you can contact me at with any questions or comments.