Clearing your way to a lower income tax bill

Workers often grumble about the amount of tax that turns their monthly pay from an acceptable, if not respectable, gross sum to a more modest net figure.

Yet, at the same time, hundreds of thousands of PAYE workers overpay income tax every year because they fail to check that they are receiving the full range of tax credits and reliefs to which they are entitled.

In 2003, some 17 per cent of PAYE taxpayers, or 287,258 people, made claims or applied to the Revenue Commissioners for a review of their tax position, with three quarters of these sharing a sum of €185 million. The Revenue expects this figure to increase to about €306 million.

The amount of tax overpaid last year is estimated to be even higher at €320-€375 million, with much of this money yet to be claimed back by its rightful owners.

Next week, the Irish Taxation Institute (ITI) is holding Tax Return Week in a bid to help taxpayers negotiate the tax maze and remove some of the "mystery and confusion" that surrounds the tax system.

"In a lot of the cases [of tax being overpaid], it's down to lack of knowledge among PAYE taxpayers of the credits and reliefs that are out there," says Breda Ballantyne, senior tax manager at accountancy firms Deloitte.

"Self-assessed taxpayers and people who have non-employment income are often much better at claiming reliefs because they have a professional tax adviser," she says.

Typical tax reliefs that remain unclaimed include credits for refuse charge payments, trade union subscriptions, rent, charitable donations and certain third-level fees (see table).

But one of the most valuable but forgotten reliefs relates to medical expenses.

This is one of the few reliefs that is available at taxpayers' marginal rate. In other words, if they pay tax at the higher 42 per cent rate, they can claim relief at that rate, rather than the standard 20 per cent rate.

As taxpayers won't know exactly how much they will spend on medical expenses, this relief can't be claimed until the end of the tax year. But other tax credits can be claimed as you go by contacting your local tax office and asking them to adjust your certificate of tax credits.

Often it is when people fail to inform the Revenue of a change in their personal circumstances that they end up overpaying tax, according to Ballantyne.

Getting married, deciding to stay at home to look after your children and even going travelling can open people up to new tax credits or entitle them to a refund.

Tax credits such as the PAYE tax credit of €1,270 and the personal tax credit of €1,580 for a single person are spread over the course of the year. If someone stops working after four months, for example, they will be due a tax refund for the remaining eight months' worth of credits.

Unless they have additional forms of income that are subject to self-assessment, like rental income, most PAYE workers will want to avoid the hassle and complexity of filling out a tax return. For this reason, it is better to claim the tax credits to which you are entitled sooner rather than later.

"It is simpler to make a claim during the course of the tax year," says Ballantyne. "By doing so, you can ensure that any refund due can be made by your employer during the tax year through the payroll, rather than you having to correspond with Revenue or file a tax return after the year end."

Three tax credits - for bin charges, trade union subscriptions and the age tax credit for people over 65 - can now be added to PAYE tax certificates online.

The simplicity of claiming these credits online appears to have gone down well with computer literate taxpayers.

A spokesman for the Revenue said it had handled almost 60,000 transactions via the web, touchtone phone and text message "self-service" options since they were introduced at the start of the year.

This includes about 13,500 online claims for tax credits, compared to around 1,900 claims via text messages and less than 5,000 over the phone.

More popular claims will be added to the Revenue's electronic services later this year.

But, according to the chief executive of the Irish Taxation Institute (ITI), Mark Redmond, PAYE workers should be given access to the Revenue's online service (Ros), which is used by companies and self-employed people.

"The ordinary PAYE taxpayer should be able to use that service and it should happen urgently. At the moment, most of the claims are going through the paper-based system," says Redmond.

Even under Ros, the Revenue frequently writes to self-assessed taxpayers asking for supporting documentation, taking some of the attraction out of electronic filing, while the ITI has also reported delays in getting through to Revenue officials when queries about the service arise.

Redmond fears the same problems will make the PAYE electronic claims services more difficult than they need be. "It is in no one's interest that the PAYE taxpayer has to engage in unnecessary correspondence with the Revenue."

The Revenue should be able to get information relating to the amount of tax paid directly from employers rather than requiring taxpayers to send in P60s or other forms, he adds.

The Revenue will start using new voice over internet protocol (VoIP) technology on its telephone system in 2006. According to the spokesman, this will allow customer records to be automatically displayed on staff computer screens when the call is received, leading to the speedier resolution of calls.

A scanning system will also streamline the processing of claims, while certain forms and information leaflets will be made simpler.

Better still, at least for those who overpay rather than underpay their tax, the Revenue is on target to introduce a new PAYE computer system later this year that will allow it to conduct automated reviews of workers' tax positions and identify overpayments.

Up until this year's Finance Act, the Revenue was not legally permitted to carry out a review without a request from the taxpayer.

The problem is, many taxpayers don't realise that too much tax is being deducted.

"PAYE workers tend to assume that the payroll is operating correctly, but there can be clerical errors," Ballantyne points out.

Workers who believe a mistake was made can request a PAYE balancing statement from the Revenue.

But they should be aware that there is always a chance that this could bring an underpayment to the Revenue's attention: in 2003, 8 per cent of the requested PAYE reviews indicated underpayments, meaning around 23,000 people actually ended up paying even more tax.

Since the beginning of the year, taxpayers can only claim back tax overpaid in the previous four years instead of 10.

The Revenue says only about 3 per cent of taxpayers have looked for reviews going back further than four years, but the ITI believes the measure means there is now an uneven playing field between taxpayers and the Revenue, which can trawl back as far as they want in search of unpaid taxes in cases of fraud and neglect.

And workers who have overpaid tax are not entitled to any interest on the refund unless the Revenue takes longer than six months from the date the claim is submitted to send them their cheque.