Tax advantage to spreading bonus payment

V

violette

Guest
Is there any tax advantage in spreading a bonus payment over a couple of pay periods?

I am constantly asked this question and believe the answer is no. As tax is calculated cummulatively, it balances out over the tax year. However, people see that they are being taxed at the higher tax band in one period, and want to avoid this by spreading the bonus.

However, I'm not sure, but is there any prsi implications?

Thanks
 
There should be no advantage on an annual basis. Unless it was a case, say, of spreading it over a couple of separate tax years to avoid it all in one year if it would push your from 0% to 20% or 20% to 41%. There may be some circumstances when you have exceeded the annual employee PRSI ceiling that you could be better off by getting some of it in that tax year rather than the next. Perhaps if this is not simply a hypothetical question you could post some figures?
 
Thanks Clubman

Its bonuses being paid this month, so it is only this tax year that is relevant. I suppose people see their tax going up for this period and think they are being screwed. They are on 20% rate, and suddenly they are paying an amt at 41%. They don't believe they get it back the following period.

Its just I get asked this question so often, I'm beginning to doubt myself.

PS Do you ever sleep?
 
I don't think that spreading it over a fre pay periods in any one tax year will make any difference since the tax and PRSI/health contribution deductions should balance out over the year regardless. But post some more specific illustrative figures if you like.
 
There is no tax advantage in spreading it out over periods within a tax year.

You should do up a short document with a few examples to illustrate. Case 1 - €3,000 per month. Case 2 - 2,000;2,000 and €4,000. Case 3 - €4,000, 2,000 and 2,000. They will see that the cumulative tax for the three quarters is the same.

If you are due to pay bonuses in January, it often saves tax by paying them in December. This is particular good for people who have just returned from abroad and have not used their tax credits. Bonuses paid in 07 may be taxed at 0%, whereas bonuses paid in 08 may be taxed at 41%.

PRSI is a different matter

Employees pay a higher rate if they exceed certain monthly thresholds. They can claim a refund at the end of the tax year, but most don't. It is worth spreading out bonuses for this reason alone.

These are the Key Figures which someone doing payroll should keep in front of them. Read the thread about Explaining Prsi, for more information
€1525 - no employees prsi
€1543 - employers' prsi is 8.5% instead of 10.75%
€2166 - employees pay 4%

Brendan
 
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