Case study: Taxation of Maternity Benefit

Introduction

This case study shows how tax credits and bands are adjusted by Revenue to account for Maternity Benefit. Note that these examples do not refer to people who are jointly assessed with their spouse or civil partner.

Employees are entitled to a personal tax credit (€1,650 in 2017) and a PAYE tax credit (€1,650 in 2017). Their standard rate cut-off point is the amount of their personal standard rate tax band. For each pay period, they pay tax at the standard rate of tax (20%) up to their standard rate cut-off point. Any income over the standard rate cut-off point is taxed at the higher rate of 40%. When the total amount of tax has been calculated their tax credits are subtracted from this figure to give the total amount of tax owed.

When a woman goes on maternity leave she may qualify for 26 weeks of Maternity Benefit. The standard rate of Maternity Benefit is €235 each week so a woman who qualifies for the standard payment will be paid €6,110 of Maternity Benefit in total. Revenue will reduce her tax credits and weekly standard rate cut-off point to account for the tax payable on her Maternity Benefit. The tax due on the weekly Maternity Benefit (€235 x 20% = €47) will be deducted from her weekly tax credits and the total amount of Maternity Benefit will be deducted from her weekly cut-off point. If a woman does not have her Maternity Benefit topped up by her employer a refund of tax may arise which can be calculated when she returns to work (see Example 2 below)

Single Person’s Tax Credit €1,650 annually
Employee (PAYE) Tax Credit €1,650 annually
Weekly Tax Credit €63.46
Maternity Benefit deduction less €47
Revised tax credit €16.46
Standard weekly cut off point (income taxed at 20%) €650 (€33,800 annually)
Revised weekly cut off point (standard cut off point minus Maternity Benefit at €235) €415

Example 1: Ann is paid her full salary while on maternity leave

Ann is on maternity leave. She continues to receive her normal gross salary of €700 per week and Maternity Benefit of €235 per week is paid directly by the Department of Social Protection (DSP) to Ann’s employer.

Revenue will receive the Maternity Benefit details directly from the DSP, reduce Ann’s annual tax credits and rate band by the Maternity Benefit amount (see above for how this is done), and send a revised tax credit certificate to her employer. Ann’s revised weekly rate band will be €415 and her weekly tax credits will be €16.46.

Ann’s weekly salary of €700 while she is on maternity leave is made up of:

Maternity Benefit: €235

Company Salary: €465

Total: €700

The company salary portion (€465) has tax, USC and PRSI deducted by the employer. The tax payable on the Maternity Benefit portion (€235) is collected by the reduction in Ann’s tax credits and rate band. Maternity Benefit is not chargeable to USC or PRSI.

Calculation of the tax payable by Ann on the company salary portion (€465):

Tax payable on €415 @ 20%

€83

Tax payable on €50 @ 40%

€20

Total tax is €103 – less tax credit of €16.46

Net tax payable is €86.54

Universal Social Charge (USC) on €465

€9.60

PRSI on €465

€18.60

Total deductions

€114.74

Example 2: Sally is not paid any top-up by her employer while she is on maternity leave. Her Maternity Benefit is paid directly to her while she is on leave.

Sally is not paid by her employer while on maternity leave so the following applies. Sally earned €700 per week (€36,400 a year). She paid tax, PRSI and Universal Social Charge weekly. Her tax and Universal Social Charge were deducted on the assumption that she would continue to earn the same amount for the rest of the year.

When she goes on maternity leave and starts getting Maternity Benefit she is no longer liable to pay the Universal Social Charge or PRSI (since these are not charged on Maternity Benefit). She may get a refund of Universal Social Charge. When she returns to work she will probably also get a refund of tax since while she is on maternity leave her tax credits are more than the tax due on her Maternity Benefit and she may also have paid extra tax on her salary before going on maternity leave.

Page edited: 2 August 2017