By R Mc Aney
In Ireland, taxation extends well beyond the income tax deducted from a worker’s paycheck. For an average worker earning €40,000 per year, the actual amount of money that remains after covering taxes and essential living expenses can be startlingly low. This article explores the financial reality for a typical Irish family, including the impact of taxes on income, spending, and everyday living, ultimately revealing how much disposable income is truly left after all necessary expenditures and additional costs such as childcare, insurance, and everyday services.
Income Taxation: The First Major Deduction
John, our hypothetical Irish worker, earns €40,000 per year. As a married man with one child, his entire income is taxed at the standard rate of 20%. This means that John pays €8,000 in income tax annually.
However, this is just the beginning. John is also subject to the Universal Social Charge (USC), which is applied on a tiered basis:
• 0.5% on the first €12,012: €60.06
• 2% on the next €10,908: €218.16
• 4.5% on the remaining €17,080: €768.60
These USC payments total €1,046.82 annually. In addition to this, John must contribute to Pay-Related Social Insurance (PRSI), which is 4% of his income, amounting to €1,600.
In total, these deductions from John’s gross income amount to €10,646.82, leaving him with a net income of €29,353.18. But this is before John even begins to cover the costs of living.
The Hidden Costs: Taxes on Spending and Everyday Essentials
Beyond income tax, the true tax burden on John’s family emerges through Value-Added Tax (VAT) and other indirect taxes on everyday expenditures.
1. Private Healthcare: Due to his child’s asthma, John has opted for private health insurance, costing €2,500 per year. While private health insurance premiums do not have direct VAT applied, the overall cost reflects taxes embedded within the healthcare system.
2. Family Clothing: John’s family spends approximately €1,200 annually on clothing, attracting 23% VAT, which adds €276 in taxes.
3. Holidays: The family takes a modest holiday each year, spending €2,000. Given that VAT on accommodation is 9%, this adds an extra €180 to their costs.
4. School Expenses: School-related costs, such as uniforms and books, amount to €800 per year, with 23% VAT adding €184 to the bill.
5. Gym Membership and Social Activities: John and his wife pay €600 for a gym membership and €2,400 on dining out twice a month. The VAT on these activities (9% for the gym and 23% for dining) totals €684 annually.
6. Grocery Shopping: The family spends around €7,000 annually on groceries. While some food items are zero-rated, many are taxed at 23%. An estimated €700 is paid in VAT.
7. Utilities: John’s electricity and utilities cost €1,500 per year, with VAT at 13.5% adding €202.50 to the cost.
8. Heating Costs: Heating the home costs around €1,000 annually, with VAT contributing €135.
Additional Essential Costs and Services
In addition to the primary expenses and taxes, John’s family incurs other necessary costs that further reduce their disposable income:
1. Childcare Costs: With both parents working, they may need to pay for childcare services, which can be significant. Depending on the area and the type of care, this could easily be €800 to €1,200 per month, totaling up to €14,400 annually for full-time care.
2. Household Insurance: Home insurance is another essential expense. On average, John might pay around €500 annually to cover their property against damage and theft.
3. Internet and Mobile Bills: Essential in today’s connected world, these services could cost John’s family around €80 per month, adding up to €960 per year.
4. Life Insurance: To secure the family’s future, John might have a life insurance policy, which could cost around €300 annually, depending on the coverage and provider.
5. Loan Repayments: If John has any personal loans or credit card debt, repayments would further reduce his disposable income. Even a modest loan could require repayments of €200 per month, amounting to €2,400 annually.
6. Miscellaneous Expenses: Unexpected costs such as minor home repairs, medical expenses not covered by insurance, or car repairs beyond regular maintenance can add up. It’s reasonable to allocate at least €1,000 annually for such costs.
The Cost of Running a Car
John drives a five-year-old diesel car, which comes with its own set of taxes and expenses:
1. Motor Tax: The motor tax for John’s car is approximately €400 per year, based on CO2 emissions.
2. Car Insurance: With a three-year no-claims bonus and two penalty points, John pays around €800 annually for comprehensive car insurance, with his partner as a second driver.
3. Car Maintenance and Servicing: Regular maintenance costs, including servicing, tires, and minor repairs, amount to about €600 annually.
4. Fuel Costs: John spends approximately €1,200 per year on diesel. Given the significant taxes on fuel, around €500 of this amount goes directly to the state.
Property and Local Taxes
As a homeowner, John also has to pay the Local Property Tax (LPT), which amounts to around €300 annually for his modest home.
Total Expenditures and Taxes
When all these costs are tallied, John’s tax payments and expenses become quite clear:
• Income Tax, USC, PRSI: €10,646.82
• Motor Tax: €400
• Car Insurance: €800
• Car Maintenance: €600
• Fuel Costs: €500 (part of €1,200 spent on fuel)
• VAT on Spending:
• Private Healthcare: Embedded costs
• Family Clothing: €276
• Holidays: €180
• School Expenses: €184
• Gym and Social Activities: €684
• Groceries: €700
• Utilities: €202.50
• Heating: €135
• Local Property Tax: €300
• Childcare: €14,400
• Household Insurance: €500
• Internet and Mobile Bills: €960
• Life Insurance: €300
• Loan Repayments: €2,400
• Miscellaneous Expenses: €1,000
John’s total tax and essential expenditure amount to approximately €35,968.32 annually.
What’s Left: Disposable Income After All Expenses
After accounting for all these taxes and expenses, John is left with only €3,384.86 from his initial €40,000 salary. This figure needs to cover any additional unforeseen costs or desired savings. The remaining amount is minimal, leaving John’s family with very little flexibility for additional spending or unexpected financial needs.
Conclusion: Understanding the Real Tax Burden
For an average Irish worker like John, the tax burden is far more than just the income tax taken from his paycheck. When VAT, excise duties, property taxes, and other indirect taxes are accounted for, combined with necessary living expenses like childcare and insurance, a significant portion of his income is redirected to the state or essential costs.
This example highlights the challenge many families face in managing their finances, as nearly 90% of John’s gross income is consumed by taxes and necessary expenses, leaving very little disposable income. For workers across Ireland, understanding this comprehensive tax burden is crucial for making informed financial decisions and ensuring that their families can maintain a stable and secure standard of living.