How your tax is calculated?

Tax on income you earn from employment in Ireland is deducted directly from your salary/wages by your employer. This tax is then paid by your employer directly to the Revenue Commissioners who collect taxes on behalf of the Irish Government.
 
The 'tax year' in Ireland operates on the calendar year basis (i.e., January - December). At the start of each 'tax year', you will receive a statement from the Revenue Commissioners. This statement is called a "Notice of determination of tax credits and standard rate cut-off point". The Notice, shows you the value of your tax credits and your standard rate cut off point.

The Standard Rate Cut-off Point

For each pay period, you pay tax at the standard rate (20%) up to your standard rate cut-off point.
 
Your standard rate cut-off point is calculated by the Revenue Commissioners by adjusting your standard rate band (downwards for any non-PAYE income and upwards for any tax reliefs available at the higher rate of tax). Any income above your Standard Rate Cut-Off Point is taxed at 42%. 

To calculate out how much tax you will pay under the tax credit system, you need to do the following: 

Tax all of your income to find your "gross tax". Income below the Standard Rate Cut-Off Point is taxed at 20%. Any income above the Standard Rate Cut-Off Point, is taxed at 42%.

Take your Tax Credits away from your gross tax. This gives you the amount of tax you pay. 

Example 

Example of a single person without dependent children earning 33,000 euro over a full tax year.

Step 1 - Calculate Gross Tax on 33,000 euro
 
Tax 32,000 euro @ 20% (Standard Rate Band is 32,000 euro in 2006 and there are no adjustments so standard rate cut-off point is 32,000 euro) = 6,400 euro

Tax the remaining 1000 euro @ 42% = 420 euro

Total gross tax = 6,820 euro

Step 2 Tax Payable 

Total Gross Tax = 6,820 euro

Less tax Credits = 1,630 euro

Tax Payable = 5,190 euro

The above is based on a full tax year.

It is important to check with the Revenue Commissioners that you are claiming all the Credits you are entitled to (see Revenue leaflet IT1) 

Rules

Your own personal circumstances will dictate the amount of tax credits you are entitled to. Further information about tax credits and revisions of existing credits is available from your local tax office.

It's important to be aware that pay you receive through working extra hours (overtime), bonuses etc., is included as part of your taxable pay for that week or month. You do not get any additional tax-free allowances against these additional earnings.