The following methods / bases are used in the calculation of PAYE and / or USC:
Cumulative Basis
The cumulative basis is generally used to calculate PAYE and USC; however, employers may only apply this basis if it is indicated in the Revenue Payroll Notification (RPN) received from Revenue. The calculation takes into account all previous income and contributions as well as cumulative cut-off points (PAYE and USC) and tax credits (PAYE only) for the particular tax year.
In certain circumstances, this may result in an employee being due a PAYE and / or USC refund, which is granted through payroll. This is most often because an employee has changed from the emergency / period 1 basis, or if their cut-off point(s) and / or tax credits have changed.
As an employee’s USC basis is generally the same as their PAYE basis, the principles discussed below apply to both calculations unless expressly stated otherwise.
Cumulative Cut-Off Points
Cut-off points are used to determine the applicable tax rate or USC rates and each one is calculated cumulatively as annual cut-off point / total pay periods in the year x pay periods in the year to date:*
- A weekly-paid employee with an annual standard rate cut-off point (SRCOP) of €33 800 will have a cumulative SRCOP of €26 000 in week 40 of the year. This is calculated as 33 800 / 52 x 40, where 52 is the total number of pay periods (weeks) in the year and 40 is the number of weeks in the year so far.*
Where there is more than one cut-off point, as with USC, the above calculation will apply to each one to get the cumulative cut-off for each band.
*Note: these are the total weeks since the start of the tax year (1 January) and not the employee’s appointment date. The same principles apply to fortnightly- and monthly-paid employees, with 52 being replaced by 26 and 12 respectively.
Cumulative Tax Credits
Once the total PAYE liability has been determined based on the applicable cut-off points and rates, it is reduced by the employee’s cumulative tax credits. Similarly to the cut-off point(s), the cumulative tax credit is calculated as annual tax credit / total pay periods in the year x pay periods in the year to date:*
- A weekly-paid employee with an annual tax credit of €3 380, will have a cumulative tax credit of €2 600 in week 40 of the year. This is calculated as 3 380 / 52 x 40, where 52 is the total number of pay periods (weeks) in the year and 40 is the number of weeks in the year so far.*
*Note: these are the total weeks since the start of the tax year (1 January) and not the employee’s appointment date. The same principles apply to fortnightly- and monthly-paid employees, with 52 being replaced by 26 and 12 respectively.
An employee may not receive a refund as a result of applying their tax credits; at most their liability may be reduced to €0.
Cumulative Deductions
Once the total cumulative liability has been determined as described above, any amounts previously deducted are subtracted to arrive at the current payslip liability. If the deductions to date exceed the cumulative liability for the period, the employee will be due a refund. This applies to USC and PAYE.
Non-Cumulative Basis (Week 1 / Month 1 Basis)
Some employees’ tax credit certificates might stipulate that employers should deduct tax and USC on a week 1 or month 1 basis. SimplePay uses the term “period 1” to encapsulate both these bases.
If the period 1 basis is applied, the following are NOT accumulated for tax / USC purposes:
- the pay
- the tax credits
- the cut-off point
The pay for each income tax period is dealt with separately. The period 1 tax credits are applied to the pay for each period and tax is deducted accordingly. No refunds may be made by the employer in such cases.
To determine the period 1 cut-off points and tax credits, the annual value should be divided by the number of pay periods in the year. For example, the cut-off points and tax credits for a weekly employee would be determined by taking the annual amounts and dividing them by 52.
Where an employer holds a tax credit certificate on a cumulative basis and they subsequently receive a tax credit certificate on a period 1 basis, the new basis will apply from the first pay day after the date of issue printed on the certificate.
Emergency Basis
An employee should be taxed on the emergency basis when:
- The employee does not have, or has not provided the employer with a PPSN
- The employee is not registered with Revenue.
A refund of tax should not be made to the employee while they are taxed on the emergency basis.
Where an RPN is issued for an employee who was taxed on the emergency basis, the employer should follow the instructions on the new RPN.
Different rules apply for the calculation of PAYE depending on whether or not the employee provides the employer with their PPSN.
*Note: there is no difference in the calculation of USC on the emergency basis for employees who provide a valid PPSN and those who do not. In both cases, USC is calculated at the highest rate, and no cut-off points apply.
No PPSN Provided
Where a new employee does not supply their employer with their PPSN, the employer is obliged to calculate the tax due on the employee’s earnings at the higher rate with no tax credit. Where the employee subsequently provides their PPSN, the normal emergency basis will apply to the earnings in that and subsequent weeks.
Valid PPSN Provided
Under the normal emergency basis, where a valid PPSN has been provided, a cut-off point (COP) is given for the first number of weeks, and it is based on the single personal tax credit and COP for the particular tax year – regardless of the employee’s marital status.
The tax deductions are increased progressively after 4 weeks as follows:
- week 1 to 4: no tax credit but COP applies; lowest rate of tax up to COP, highest rate on balance
- week 5 onwards: no tax credit or COP; highest rate of tax