What Is the Earned Income Tax Credit and How Does It Work?
What is the Earned Income Tax Credit all about?
In Budget 2018, self-employed workers in Ireland saw the Earned Income Tax Credit raised from €950 to €1,150.
Introduced in January 2016 to help level the playing field between the taxation of the self-employed and that of PAYE workers in Ireland, the credit is separate to the Employee Tax Credit in that it can also be claimed by people who are self-employed.
The Irish Government had previously said its intention was to bring this credit up to the same level enjoyed by PAYE workers at €1,650.
Responding to the increase in Budget 2018, David FitzGerald, Director at CPA Ireland, said: “The ongoing tax discrimination against the self-employed is very regrettable, and we have consistently called on the government to address this.”
Mr Fitzgerald described the increase of €200 in the earned-income tax credit as “derisory”, and said it was a disincentive to entrepreneurs. “As the government had previously committed to ending this imbalance, it is now long overdue. The government needs to clarify its timeframe in this regard.” (Irish Times)
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Income that qualifies for the credit includes:
Trading income (Case I and II)
and
Pay earned by proprietary directors.
The credit isn't available against your passive or investment income, such as:
rental income
or
deposit interest income.
The credit available is the lower of:
€1,150
or
20% of your qualifying earned income.
So, if you run your own business or trade, you should be able to claim the credit at the end of the year on your Form 11 tax return.
Earned Income Tax Credit Rates
| 2018 | 2017 | 2016 |
| €1150 | €950 | €550 |
The amount of credit you can get also depends on your earned income.
Case Studies
1. If you have income that qualifies for both the Employee Tax Credit and Earned Income Tax Credit, then the combined value of these credits cannot exceed the maximum value of the Employee Tax Credit. The maximum you can get between the PAYE credit and the Earned Income Credit is €1650.
Example:
Mary had a salary of €6000 in 2017 and a small profit from a food business of €4000.
In this case she would get a PAYE credit on the salary of €1200 (€6000 X 20%) and an earned income credit of €800 (€4000 X 20%) which is a total of €2000.
However the maximum credit you can claim between the two is €1650, so the earned income credit is now restricted to €450.
2. If you get the full PAYE credit you will not get any Earned Income Credit as it's not possible to claim both.
Example:
Tom is a college professor on a salary of €75000 but also has his own consulting business.
In this case he doesn't get any Earned Income Credit on the consultancy business profits as he will get the full PAYE Credit on the college earnings.
3. In a joint assessment situation each person's income is looked at separately. Where joint assessment applies, a separate tax credit may be due in respect of each spouse’s individual income.
Example:
Company Director Michael Downey owns 50% of a company is on a salary of €50,000.
In 2017 gets the maximum earned income credit of €950. Tony's wife Barbara, also works for the company, and is on a salary of €30,000.
She will also get the full earned income credit of €950 for 2017 as she will not be entitled to the PAYE credit.
If you do your own tax return the tax credit needs to be claimed by ticking the box for it under the personal credits section.
And if you haven’t got the credit but you're entitled to it, you don't have to wait until the end of the year to sort this out as you can contact Revenue to get the credit during the year. You can also apply with Taxback here and we can help get it for you.
As a self-employed person, you must pay income tax under the self-assessment system and you should always keep proper records of:
- Purchases and sales of goods and services
- Amounts received and all amounts paid out
- Supporting records (for example, invoices, bank and building society statements, cheque stubs and receipts)
You don't have to send them into Revenue, but you'll need them in case of an audit. You should keep your records for a minumum of 6 years.
Need help?
If you need help with your tax return or want to know if you're entitled to the Earned Income Tax Credit, simply apply here.
In conclusion, the Earned Income Tax Credit serves as a vital component of Ireland's taxation system, aimed at leveling the playing field for self-employed individuals. While Budget 2018 brought about a modest increase in this credit, discussions surrounding tax equality persist. As self-employed workers navigate the complexities of taxation, understanding and utilizing available credits like the Earned Income Tax Credit remain essential. By staying informed and engaging with the tax system, individuals can optimize their financial situation and contribute to ongoing conversations about tax fairness in Ireland.
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