Taxation of Illness Benefit?

A

animaal

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Hi. I was out of work due to illness and received Illness Benefit from the state. I understand this is subject to PAYE, so as a higher-rate taxpayer I expect to be paying 40% of it back in PAYE.

On my updated tax credit certificate, I see Revenue has been informed of the first €2412 benefit I received. They have reduced my tax credits by €2412 and also reduced my standard rate tax band by €12064. From what I understand, the effect of reducing my tax credits is that I will pay an extra €2412 in PAYE. And the effect of the tax band reduction is another €12064 x 20% = €2412 in PAYE. So in total, I'll be paying an additional €4824 in PAYE for the €2412 in illness benefit I received.

This seems very wrong - the extra tax being double the benefit received. I'd expect the additional PAYE to be 40% of €2412, i.e. approx €965. Or am I misunderstanding how my tax credits work?

tax credit reduction.png
 
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animaal said:
Hi. I was out of work due to illness and received Illness Benefit from the state. I understand this is subject to PAYE, so as a higher-rate taxpayer I expect to be paying 40% of it back in PAYE.

On my updated tax credit certificate, I see Revenue has been informed of the first €2412 benefit I received. They have reduced my tax credits by €2412 and also reduced my standard rate tax band by €12064. From what I understand, the effect of reducing my tax credits is that I will pay an extra €2412 in PAYE. And the effect of the tax band reduction is another €12064 x 20% = €2412 in PAYE. So in total, I'll be paying an additional €4824 in PAYE for the €2412 in illness benefit I received.

This seems very wrong - the extra tax being double the benefit received. I'd expect the additional PAYE to be 40% of €2412, i.e. approx €965. Or am I misunderstanding how my tax credits work?

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I admit it very confusing ways they do that. But it looks correct to me but not a tax person.

But by doing it that ways the reduction in tax credits captures if you lower payed worker only and the rate band reduction is to capture the fact you have this income that combined with other income push you into higher tax bracket. Both combined means it's been taxed at 40% if you had income from other sources for the year. Someone might be able to explain it better.

So tax credit reduction is so your been at 20%. Unless you credits to cancel it out.
The rate band reduction is difference from 20% Standard band to 40% Higher rate band. Net 20%

So both of the combined to 40% tax rate ( if you earn enough income in the year that is)
 
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Thanks @irbx . I've always been a higher-rate taxpayer. Don't the changes to tax credits and bands mean I'm paying an extra €4824 in PAYE for having received a benefit of 2412?
 
animaal said:
Thanks @irbx . I've always been a higher-rate taxpayer. Don't the changes to tax credits and bands mean I'm paying an extra €4824 in PAYE for having received a benefit of 2412?
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No the rate band change is capture the extra 20% difference! between the two. if you higher rate worker for the year. The tax credits reduction captures the first 20% which brings it to 40% total
 
Sorry, I'm still not following. When calculating my PAYE:
  • I was previously paying 20% on the first €42000 and 40% on everything after that. Now I'm paying 20% on the first €29936 and 40% on everything after that. So the net change from that alone is an increase of €2412 in PAYE for the year.
  • Then the tax credits. Tax credits reduce the PAYE that I pay after calculating using the tax bands above. So when my tax credit is reduced by €2412 it means I pay €2412 more in PAYE, regardless of the tax bands.

Either of these two changes alone would result in me paying an additional €2412 in PAYE, meaning I'm paying back a sum equal to the entire benefit I reeceived. The two changes together mean I'm paying back double what I received. Unless I'm completely mistaken, which is very possible.
 
animaal said:
Sorry, I'm still not following. When calculating my PAYE:
  • I was previously paying 20% on the first €42000 and 40% on everything after that. Now I'm paying 20% on the first €29936 and 40% on everything after that. So the net change from that alone is an increase of €2412 in PAYE for the year.
  • Then the tax credits. Tax credits reduce the PAYE that I pay after calculating using the tax bands above. So when my tax credit is reduced by €2412 it means I pay €2412 more in PAYE, regardless of the tax bands.

Either of these two changes alone would result in me paying an additional €2412 in PAYE, meaning I'm paying back a sum equal to the entire benefit I reeceived. The two changes together mean I'm paying back double what I received. Unless I'm completely mistaken, which is very possible.
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Sorry maybe I misunderstood. How much illnesses benefit payment did you actually get from social welfare?
I think your saying you got payed roughly 9 weeks illness benefit for year but you been taxed on 52 weeks of illnesses benefit?

If this is the case then at end of the tax year . Think after 14 Feb of the next year the social welfare system will up revenue with actually figures you received in the previous year and completing a tax return will issue reblance of this and tax refund of the difference. I believe they do it this ways so you don't understand pay tax and have big bill at the end of the year.

But if illnesses claim is closed off not sure if their a ways to update this in the current tax year with revenue. Maybe someone else can advise or open my query on revenue website. With social welfare statement showing the total value payed out.
 
Revenue are calculating based on receipt of €2412 in illness benefit in the 2024 tax year.
I've received more illness benefit since then, and also closed off the benefit and returned to work. The tax credit cert is dated 01/03/2024 so I assume they don't yet take into account anything since that.
The revenue online details support that:

1711192008572.png

It just seems strange that when I receive illness benefit I pay exactly double the benefit in PAYE. I have made a query on the Revenue site, but I know it can take weeks to get an answer.
 
Consider the annual picture and then divide everything down by 12 or 52 depending on monthly/weekly pay etc.

For income tax calculations:
Step 1 is to calculate the tax owed to revenue which is based on your salary/income using the rate bands.
Step 2 is to deduct your tax credits (which is notional money owed to you from Revenue).

Say you earned 42k and you got 12064 from overtime, then the 12064 gets taxed at 40% and salary at 20%. So 40% of 12064 = 4,825.60

In your case, from Revenue's perspective, you have a salary (42k) and a payment from another arm of the state (DSP Illness benefit), 2 sources of income. They are going to balance the tax owed by making adjustments to your rate bands and credits to account for the state payment which you receive directly, gross. So instead of overtime you are getting a DSP payment and you owe 4,825.60 which you are going to pay through your payroll.

Step 1 - Revenue will reduce your rate band by 12064. So instead of paying 20% of 12064 you now pay 40% of 12064 an increase of 20% of 12064 = 2412.80

Step 2 - Revenue owe you tax credits. So Revenue will now reduce the tax credits by 20% of 12064 = 2412.80

Difference: 2412.80 * 2 = 4,825.60

Total tax paid:
12064 DSP = 0 (paid gross)
42k salary: 20% of 29936 = 5987.20 + 40% of 12064 = 4,825.60 = 10812.80 - 1537.20 (tax credits: 3950 - 2412.80) = 9275.60

Total tax paid for Salary + overtime (54064):
20% 42k = 8400 + 40% of 12064 = 4,825.60 = 13225.60 - 3950 = 9275.60

Say your employer adjusts your salary so you earn 42k including illness benefit. So you receive 12064 gross from DSP + 29936 salary.

Step 1 - Revenue have reduced your rate band by 12064. So you continue to pay only 20% of 29936 = 5987.20 (But this has not impacted the 12064 which you have received gross from DSP. So you still owe 20% of 12064).

Step 2 - Revenue owe you tax credits. So Revenue reduce the tax credits by 20% of 12064 = 2412.80 which you now don't receive.

Total tax: 5987.20 - (3950 - 2412.80) = 4450

On 42k salary, no DSP: 42k * 20 % = 8400 - 3950 = 4450

How DSP payments are taxed

This page explans how Department of Social Protection payments are taxed
www.revenue.ie www.revenue.ie
 
Thanks @Itchy I think I see what's happening.

The €12064 is the €232 weekly rate multiplied by 52. So my 2024 taxes are being adjusted as if I will be receiving illness benefit for the full year. Which isn't the case.

40% of the theoretical €12064 would be €4825, which is the reduction in credits and bands they've applied for 2024. So it'd all be fine if I was claiming Illness Benefit for the full year.

I assume they'll re-adjust things shortly.
 
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