An overview, the differences, examples and how you can apply for each to reduce your tax bill
To minimise your tax bill and increase your net take-home pay you must first have at least a basic understanding of certain tax areas. Below we have provided an overview of tax credits, tax relief and tax exemption – these are necessary areas for consideration when trying to reduce your tax bill and are a source of confusion for many. Their differences are highlighted, examples are provided and how you can apply for each is detailed.
What are Tax Credits?
In short, tax credits lower the amount of tax that you pay. Some key points to note are:
- Tax credits are granted on a yearly / cumulative basis.
- Unused tax credits do not carry over into the next tax year.
- You are entitled to Personal Tax Credits.
- You may be entitled to additional tax credits (e.g. Incapacitated Child Tax Credit, Age Tax Credit, Rent Tax Credit, Employee Tax Credit etc.) depending on your circumstances.
- Tax credits can be automatically claimed while others need to be claimed manually.
- You can use Revenue’s myAccount feature to claim tax credits (click here to sign in or click here to register for myAccount).
What is Tax Relief?
The terms tax relief and tax credits are regularly used interchangeably as both reduce an individual’s tax bill. Specifically however, tax relief lowers the income on which you pay tax. Revenue notes that:
The amount of relief you receive depends on the rate of tax you pay. If you pay tax at the higher rate of 40% your income is reduced by the relief and the balance is taxed at 40%. Otherwise it will be reduced by the relief and the balance is taxed at the standard rate of 20%.
Tax relief can be claimed on tuition fees, mortgage interest, pension contributions etc. Tax relief usually takes the form of a refund on tax paid. You can use Revenue’s myAccount feature to apply for a refund (click here to sign in or click here to register for myAccount).
What is Tax Exemption?
Tax exemption is a term used to refer to types of income that are not subject to tax, i.e. tax does not have to be paid on certain types of income – these incomes have tax exemption. Certain conditions must be met, limits may be imposed and USC and PRSI may still require payment. For example, income from artistic work and room rental are exempt from certain taxes under certain conditions. For more details on exempt incomes and how to apply for them, click here.
Summary: Tax Credits vs Tax Relief vs Tax Exemptions
|These lower the amount of tax that you pay||These lower the income on which you pay tax||This is a term used to refer to types of income that are not subject to tax|
All can increase your net take-home pay
(Article source: revenue.ie)
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