The New ‘Earned Income Tax Credit’ for 2016 - what is it?

What is the New ‘Earned Income Tax Credit’?

The ‘Earned Income Tax Credit’ was announced in Budget 2016 and applies for individuals earning self-employed trading or professional income and to business owners/managers who are not eligible for a PAYE tax credit on their salary income. It applies for the tax year 2016 onwards, subject to legislation, and provides for a maximum tax credit of €550 in respect of your earned income.

The tax credit will be calculated at 20% of your earned income (excluding earned income that is taken into account for the PAYE Tax Credit) subject to a maximum of €550.

What is Earned Income?

For the purpose of this Earned Income Tax Credit, the qualifying income is earned income other than that income that qualifies for the PAYE Tax Credit.

If you are non-proprietary director or employee and your earnings are taken into account for the purposes of the PAYE Tax Credit, the new Earned Income Tax Credit is not available to you.

If you are a proprietary director or self-employed individual and the PAYE tax credit is not available to you, the new Earned Income tax credit is available.

Can you get both PAYE & Earned Income Tax Credit?

What if you have income that qualifies for both the PAYE tax credit and the Earned Income tax credit?

If you have earned income that qualifies for both the PAYE Tax Credit and the Earned Income Tax Credit, then the combined value of both Tax Credits cannot exceed €1,650.

* An Example of No Restriction in the Earned Income Tax Credit

If you have a PAYE pension income of €10,000 and Self-employed business profits of €2,000

PAYE Tax Credit: (€6,000 x 20%) €1,200

Earned Income Tax Credit: (€2,000 x 20%) €400 – Maximum Tax Credit is €550

As the aggregate of the two tax credits is €1,600 (€1,200+€400) and less than €1,650, there is no restriction.

** An Example where the Earned Income Tax Credit is restricted

If you have a PAYE pension income of €7,500 and Self-employed business profits (Case 1) of €20,000

PAYE Tax Credit: (€7,500 x 20%) €1,500

Earned Income Tax Credit: (€20,000 x 20%) €4,000 – Maximum Tax Credit is €550

However, the aggregate of the two tax credits cannot exceed €1,650 therefore the amount of the Earned Income Tax credit is €150 (€1,650-€1,500).

I hope you find this information useful. If you have any questions, do feel free to contact me.

Timothy Kelliher Chartered Accountant

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