Irish Taxes for the Expat (Part 1)

Today I’m going to talk about what I’ve learned so far about Irish taxes. I’m sure there are plenty of nooks and crannies to explore on the subject, and I’ll provide sources for everything that I’ve found to back them, but I’ll leave readers to interpret those sources by themselves. This is my polite way to say that I won’t be held responsible if the Revenue comes for you 🙂

I’m also talking from the perspective of an expat living in Ireland, so keep that in mind. In other words, this is stuff that I would like someone to have explained to me before moving to Ireland.

Overview

The Irish tax system is very progressive. That seems to be a fact. It also seems to work pretty damn well, but this is purely based on my experiences after a few years living and working in Ireland and taking into account that I have other countries where I have lived to compare against.

PAYE

For the purposes of this post I’ll cover only the Pay As You Earn (PAYE) system, which is the traditional system under which all employees (in the sense that you are working for somebody else, usually a company that pays you a salary) earn income. There are different rules for self employed people.

The bands of tax are very simple. There is a Standard Rate of 20% and a Higher Rate of 40%. That’s it. Only two bands. Seems too good to be true right? It is. As we’ll see further down, matter get more complicated, but nothing compared to my native country I assure you.

How do you know which band you pay tax on? I mentioned earlier that the Irish are very progressive with their tax. The rules then are:

Income up to 33.800 euros -> You pay 20%

All other income above that -> You pay 40%

Some countries put the tax payers on a band according to their absolute income. For example, if you were to make 40.000 euros in income other countries would tax the whole of your income at 40% (assuming the same two bands as the Irish system), making it a not so progressive system.

So far, so good, seems pretty simple.

Consult the official Revenue documentation here.

Universal Social Charge

Universal Social Charge, or USC for short, is one of the most dreaded taxes in Ireland. Why, you might ask? Well, once upon a time, not so long ago, there was no USC. The roar of the Celtic Tiger could be heard throughout the land. But one day the Tiger fell down into a rabbit hole, of all places, and a very big one at that. Once it managed to climb back out of the hole the roar was gone and the USC was on.

How does this tax work? It’s applicable to all income and tax credits don’t have an effect on it. It’s also applicable on other things, such as benefit in kind payments. This tax has been reduced for 2016 and again for 2017. The current rate of tax are the following:

Income up to 12.012 euros -> You pay 0.5%

Income between 12.012 – 18.668 euros -> You pay 2.5%

Income between 18.668 – 70.044 euros -> You pay 5%

Income between 70.044 – 100.000 euros -> You pay 8%

Income above 100.000 -> You pay 8%*

*I believe this value is 10% for self employed. I’m not sure if this changed for 2017.

See more about the USC here.

Tax Credits

The Irish system works by using a number of Tax Credits against your income, in order to assess how much money you owe to the Revenue. The Tax Credits are essentially allowances that reduce the amount of income that is taxable. Under the PAYE system all employees are entitled to a Tax Credit worth 1.650 euros.

Another tax credit that all people are entitled is worth another 1.650 euros. From this we can deduct that the majority of employees in Ireland have at least 3.300 euros worth of tax credits.

Examples of other tax credits include dependent care, single parent or health insurance.

See more about tax credits here.

Pay Related Social Insurance

PRSI is not exactly a tax, since it’s not charged by the Revenue. It’s charged by the Irish Welfare system and the goal is to provide Social Welfare to citizens and residents. The rate for employees is 4% on all income subject to PRSI, which typically is the same as all income subject to USC.

Learn more about PRSI here.

Emergency Tax

Finally, an important note on emergency tax, which typically happens when you start working in Ireland as an expat or change jobs. Let’s imagine you land in Ireland in June and you start working. The Revenue assumes you should be paying tax since January 1st and when they see you haven’t they also assume you’ve been making the amount of your first paycheck since January 1st. This is due to the fact that they haven’t received a P45, which is a statement an employer gives an employee after the contract has finished, for tax purposes. You’re brand new so there’s no P45 in store for you! Relax, there’s a solution, and a simple one at that. Give the Revenue a ring or contact them by email and they’ll update your status. Usually this takes one or two months until solved and when it happens you’ll get all the extra money you might have payed in taxes in the beginning of your employment.

Learn more about emergency tax here.

Find here an Excel spreadsheet to help you simulate the amount of taxes you have to pay.

Debt: The First 5000 Years by David Graeber

Every once in a while I read a book that feels like opening a windows to the world, insofar as reading books about our world, presumably (can be debated, in another day) increases our knowledge of it, since apart from the oral tradition it has consistently been the best way to transfer information through the ages.

Debt is one of these books. Written by David Graeber, an anthropologist by trade, it delves into the History of Humanity and explores relationships about debt, money, slavery, war and capitalism. This is not, by any means, a light book, since it has an extensive bibliography and many notes, but the good news are that it’s very well written, to the point that I don’t feel like I’m reading a university worthy tome (it certainly is). I actually came out the other side feeling like this can probably belong on a curriculum of books that everyone should read. It’s also a book that should prove it’s value on a reread, since many of the concepts and relationships that the author uncovers will take some time to settle.

The author starts by examining the story of how debt and money came to exist. Typical assumptions have that primitive economies worked on barter and trading goods directly, and that only when this system outgrew it’s boundaries people became concerned with creating artificial instruments to carry value (i.e. money, usually in the form of coins) and when these were developed enough, more complex financial instruments such as credit and debt came to be.

Barter -> Money -> Credit -> Debt

What the author exposes is then, an inverse of the traditional story. What if the reality is that debt came at the very beginning and is the root of all economies? An example of this can be evidenced by the fact that the Bank of England, one of the first central banks in the world, came to the be after a £1.2 million loan from a group of wealthy bankers to the then King.

In a fascinating journey throughout all corners of the world, we learn about how the Abbasid Caliphate had a standing army of slaves, and how the Islamic souks could well possibly be the original free markets that libertarians today talk about. We spend some time in Medieval China too, where we learn about Buddhist monks that used financial instruments in their temples to the point that we would now call them corporations.

The author identifies periods of History which alternate between virtual and bullion currency, that is periods where systems of credit were the main currency in use and periods where gold, silver and other metals were the main currency (or backing of that currency) circulating.

These major periods of History end in 1971 with the US president Richard Nixon announcing that the US dollar will be no longer redeemable in gold, effectively dropping what had become known as the gold standard. This recent age is then a mix of what happened throughout History, with no clear conclusion on what is going to happen, but the evidence of the last 40 years stands to say that the US dollar, the de facto world currency, is again a virtual one, but this time backed by the military power of the US:

“If history holds true, an age of virtual money should mean a movement away from war, empire-building, slavery and debt peonage (waged or otherwise), and toward the creation of some sort of overarching institutions, global in scale, to protect debtors. What we have seen so far is the opposite. The new global currency is rooted in military power even more firmly than the old was. Debt peonage continues to be the main principle of recruiting labor globally: either in the literal sense, in much of East Asia or Latin America, or in the subjective sense, whereby most of those working for wages or even salaries feel that they are doing so primarily to pay off interest-bearing loans.”

It’s a frightful ending to the book, but it’s not the only conclusion. There are many more the reader should be aware of, and not all as dark as the paragraph above. It’s a great read, and one that should get better with the years.

Ireland Budget 2017 after the dust settled

October 11th was Budget day in Ireland and with it new rules to learn and explore as usual. It’s interesting to note that the fast pace of our modern world (and economy) is reflected on this. I wonder if there ever was a day when we just took for granted that we would pay the same amount of tax, social security and get the same protections. I guess in the really old days the answers would be a lot, none and none, respectively.

I like to be a bit more meticulous and so let’s see what is new for people living in Ireland in 2017. The two biggest changes are the Universal Social Charge (USC) being lowered by half a percentage point on the lower three bands and a 5% tax rebate on first time buyers of new homes.

I plan to talk more in the future about the tax system in Ireland but for now I’ll highlight only these two points.

A bigger overview can be found here.

Most of the measures introduces left most of us very skeptic, especially in matters concerning the housing market crisis that is ongoing. Allegedly, prices on new homes have already risen since the Finance Minister officially announced the measures.

Overall, the tendency of the last two years to lower taxes is continuing, despite a slowing down this year. The 2015 and 2016 budgets were arguably more generous from this point of view. Ireland is still a very progressive system and these numbers, before the Budget for 2016, show that the lowest income people pay very little to no tax, while the tax burden falls on high income earners.

Another interesting point is that according to that article, Irish high income earners (characterized as earning 75.000 euros per year) already pay more effective tax than their Swedish counterparts. I’m not too sure about this, and I would direct anybody interested in this matter to dive on their own (one of these days I’ll whip up my own research about this). What matters though is that (as fame and my own experience would have it) the Irish taxpayer doesn’t get nearly as much bang for their buck as the Swedish one. We can dig into this in another post, but scratching the surface on things such as maternity and paternity leave, childcare and healthcare leaves us in Ireland way behind the Swedes.

Finally, I’ve added an Excel spreadsheet to calculate taxes in Ireland which offer more flexibility than traditional solutions found online, such as adding bonuses, voluntary contributions to pension schemes and passive income from dividends and capital gains. You can find it here.

Why should you be financially independent?

Today I’ll approach a subject that I’ve been researching the last few months, more in depth. I’ve toyed with the notion of being financially independent in the past, not because I don’t like what I do, as I am fortunate enough to have a great job which I actually like, but essentially because I like imagining what would happen if that was ever the case. You are considered to be financially independent when you don’t depend on a fixed source of income that relies on you having to work for someone, a certain number of hours, a certain number of days, for a long period of your life, or as most people would put it, a job.

Googling returns the following quote:

Financial independence is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.

Not having a job typically frees up time. What would I do all day? I’m an avid reader, does that mean that I could read hundreds of books per year? Would I get bored after a while? Would I finally set down the laptop and write a novel? Would I build a startup worthy project? Dust off my Japanese and read up on my stockpile of manga? And the million euro question, do I even need all that time to do those things?

The answer to this last question is, most probably, no I don’t. It comes down to prioritizing your life and doing only the things that are worth doing. Having said this, having all the time in the world wouldn’t hurt. I remember reading somewhere (I forgot where) that your best work comes out when you don’t need to get paid for it. For every person the reasons will be different, but there are discernible patterns emerging among all of us:

  1. Not having to work a typical 9 to 5 job
  2. Not being tied to a physical location
  3. Ability to travel more and having more time off

Let’s examine these three points in more detail.

Not having to work a typical 9 to 5 job

Once you’re financially independent, you really don’t need to work for anybody, anymore. It doesn’t mean you can’t do it, it just means that you’ll be able to live more “on your terms”, which roughly translated can be considered being able to not take any job that doesn’t connect with you, doesn’t pay enough for the troubles it creates or just sit back and not work at all. The main point is indeed, the fact that you now have a choice. And having that choice is what most of us fight for during our lives.

Not being tied to a physical location

This one resonates with me. I’m an economic migrant and have been one for a while. Coming from Portugal, a country that doesn’t really have many opportunities for good jobs or decent pay, I have been living on and off from my country for almost 7 years at this point. Between a brief stint in California and my current life in Ireland I wouldn’t expect going back to Portugal in the near future. Having the ability then to choose where to live, is very important to me. I could go live in other countries, stay in Ireland, retire in Portugal, who knows? Even though I like Ireland I wouldn’t mind living in other countries in the future. I believe living abroad is one of toughest things you can do in your life and at the same time (as with all hard things) it’s a great opportunity for self growth and discovery. Picking up a brand new culture, new language, new friends and landscapes will enrich your life and for me it runs the risk of being an addiction and not wanting to go back to the old life in my own country. The important thing then, is that with financial independence, I will have some wiggle room on where I choose to spend my days.

Ability to travel more and having more time off

It’s no secret I love traveling. Most people like it, so  I’m not in any way special or even different. Some like going to resorts, while others are more attracted by the backpacking style of it. If you have to work a job, independent of where you are in the world, you’ll have limited time off. Some of us have it better than others, but make no mistake, with a job comes a bunch of strings attached and one of those is pretty much the limited ability of doing whatever you want with your days (otherwise known as time off). I’m not even considering the paid aspect of paid time off, as most jobs might give you the ability to take time off without being paid, but in my experience those are few or next to none. In conclusion, then, being financially independent will allow you to take control of your holiday plans, which might not even include travel, it could be just spending a few weeks of the year relaxing with your family or friends.

And there you have it. Three reasons that I suspect cover 99% of the reasons why people decide to pursue financial independence and early retirement. There are of course a myriad of other reasons, some people want to spend more time bring their children up, others do it for reasons that are more in line with their ethos, such as rejecting a consumerism life style, but those will differ for each and all of us and in reality they are secondary effects of these main reasons.

As I mentioned before, a secondary effect, if you want, of having more time off, is that you can use that time to actually just…work. Like I mentioned before, maybe there’s a side project that you always wanted to work on, or maybe there’s a passion that you want to turn to full time job and earn a living at. Once you buy that time, you can do it.

In the future I’ll talk more about the why, but mainly the what and how of financial independence, with some details that I hope my European audience finds interesting, so stay tuned!

Flash Boys by Michael Lewis

Michael Lewis is now one of my favorite authors. His style reads like water flowing freely from the Icelandic glaciers, which essentially means that I can binge read one of his books in a couple of days and feel like that I didn’t got enough of that sight. His latest effort, which I came to be aware of, originally via this article in the New York Times Magazine, a couple of years ago, is truly amazing. I believe you really need to stand out as a non fiction writer to be able to deliver this level of novel like experience to an otherwise FinTech tale. I bet if I was going to tell you the story you’d drift off into some unicorn infested land after the first thirty seconds. Instead, I’ll just state a couple of main points to draw you in.

Michael Lewis comes at this story in his fast paced style grabbing you very quickly with his rogue Brad Katsuyama, the unlikely Canadian hero that brought the high frequency trading world to the public eye. By positioning our hero as an innocent bystander that happens to walk into a broad daylight robbery in action by some shady characters, seeing himself being dragged in to the plot, even though there’s no real desire on his part to be a part of it. It’s a great premise which delivers all the way to the end with a few twists and interesting revelations in the middle.

If you’re anything like me, you are also craving good stories that have some element of software engineering on it. While Neal Stephenson and William Gibson provide some good alternatives, it feels like there’s nothing really out there apart from cyberpunk and sci-fi tales to cover for it. It’s refreshing then to see a non fiction tale that uses a few characters, real world people, that really do put technology in front, despite the dollar signs to do otherwise. I’m referring of course to Sergey Aleynikov, one of the central figures of the story and a very interesting one at that. The fact that you can actually learn something from such a good story like this one in this sense it was a surprise. The explanation of all the different types of orders and puzzles that our high frequency traders unravel was particularly interesting. It’s also interesting to note that the complexity that governs financial markets today eclipses whatever 99% of the world thinks its happening at any moment in time. Think about it this way: if you think that calculating your taxes is something that only your math wiz cousin really can do, imagining him telling you that really only his math wiz PhD third degree cousin/acquaintance who also holds a dual degree in Genetic Engineering and Statistics has some idea of, should do the trick.

Overall, you’ll feel you’re not only one step closer to understanding our world after reading this book, you’ll probably feel like you understand even less, which is fine too. If it leaves a few burning questions on your head than that’s worth your time.

One final scary thought. The book was published back in 2014, which means that whatever is happening now should be changing a lot faster and be a tidy bit more complex.

Happy readings.