The following is called the income tax equation: Net tax = gross tax – tax credits
Net tax (tax payable) is the amount of tax due after the tax credit has been deducted.
If James has a tax credit of €1 500, his net tax (tax payable) will be: €5 000 – €1 500 = €3 500 Therefore, his fi nal pay after deductions is €25 000 – €3 500 = €21 500 This is his net income (also known as take home pay). Net income will always be less than or equal to gross income.
Worked example 1
Lorraine earns a gross salary €32 000 per annum (per year). She must pay income tax of 21%, and she has a tax credit of €1 650. (i) How much income tax must Lorraine pay? (ii) Calculate Lorraine’s net pay.
Solution (ii)
Net income is the amount of salary or wages a person is paid after all deductions have been made.
Worked example 2
Simon is a make-up artist. He earns €642·30 per week. He pays tax at 23%. He has a tax credit of €63⋅50 per week. Simon also has a car loan of €45 per week, and pays his local property tax at €9⋅50 per week. He gets both of these payments deducted from his gross wages at the end of each week.
(i) What is Simon’s gross pay? (ii) What is the gross tax due on Simon’s wages each week? (iii) How much tax does Simon actually pay each week? (iv) After all deductions from Simon’s wages are made each week, how much is his net pay?