Marginal Relief

With reference to your recent mention of marginal relief which cropped up in a reply on a question about DIRT tax, I wonder if you can advise me. I am 66 years old. My total income for the last tax year - 1997/98 - was £16,216 (€20,590). I'm married and in that year received a personal allowance of £5,800, an age allowance of £800 and a PAYE allowance of £1,600. I paid tax on £8,016 at 26 per cent, giving a total tax bill of £2,084.16. Could you please let me know if I would be eligible for marginal relief? Also, if I would be entitled to a rebate on DIRT paid?

Mr T.C., Dublin

I am glad to return swiftly to the subject of marginal relief, partly because it is a subject of interest to many readers, but more particularly because some of those readers have been quick, and quite rightly so, to point out that the equation I used in demonstrating how to work out tax liability in a situation where marginal relief applies was not entirely correct.

Put simply, marginal relief applies where your income exceeds the relevant exemption limit but is not more than double that limit. It applies in cases where the tax liability would be less than it would be taking into account the individual's tax allowances. In other words, you get one or the other.

Looking at your situation, you turned 65 in the tax year 1997/98. As you say, looking at allowances, your tax liability would be £16,216 (£5,800 + £1,600 + £800) = £8,016. Taxed at 26 per cent, the prevailing standard rate for that year, your income tax bill would be £2,084.16.

For the purposes of marginal relief, we need to look at your exemption limit rather than your tax allowances. For a married couple, it is the older spouse's age that is relevant. As you are over 65, the relevant exemption limit in 1997/98 would have been £9,200. An income of £16,216 is less than twice this amount, so to calculate what tax would be payable under marginal relief you take the difference between the income and the exemption limit - £16,216 minus £9,200 - which leaves you with £7,016. This is then taxed at the marginal rate - 40 per cent - leaving you with a tax bill of £2,806.40. As you can see from the figures, marginal relief would not apply in your case.

Confusion may well have arisen from my last mention of marginal relief, when I incorrectly calculated tax at the standard rate - 26 per cent in 1997/98 - on 40 per cent of the difference between the rates. That is not the case. The tax is levied at 40 per cent on the whole of the difference between the rates.

In order to qualify for marginal relief, you would have had to have an income of no more than £13,400 in that year bearing in mind the allowances you are claiming. You see the exact cut-off point depends on three factors - income, age and tax free-allowances. Thus, it could be a different figure for almost all taxpayers. For instance, the number of dependant children, medical expenses, mortgage interest relief and a whole range of other allowances and reliefs would impact on the overall figure.

In your case, even if you had qualified on the basis of income, age and allowances, you would have had to recalculate the figures once again when taking DIRT into account. This is because your income from all sources must be taken into account when determining eligibility for exemption or for marginal relief - including gross deposit interest on bank or building society accounts and dividend income from shares. Remember that in order to get a refund on DIRT (Deposit Interest Retention Tax), you need to be 65 or over in the relevant tax year or permanently incapacitated.

However, for those who feel they may have a case for marginal relief and who have already paid their tax, they can claim a refund as long as it is in the last few years. This should be done through your normal tax office in the first instance. If you wish to claim exemption or marginal relief for the current, year, fill in Form TFA1, which is sent out with the annual notification of tax-free allowances or can be obtained from any tax office.

In a reply, you stated that people over 65 are eligible for marginal relief if their income does not exceed twice the exemption limit. I am 75 years old on a pension of £18,880 per annum and have £29,000 invested in a Special Savings Account (SSA) on which I pay DIRT tax. Am I entitled to a rebate of this tax? What are the limits which apply to marginal relief and are those strict limits? Perhaps you would let me know where I can obtain particulars of this relief.

Mr T.R., Donegal

The whole issue of DIRT and SSAs has become a live one since the Government reduced much of the advantage in using such a vehicle by raising the level of DIRT applicable to 20 per cent from 10 per cent at the same time as the standard rate of income tax has fallen to 24 per cent. There are two separate elements at the heart of your question. First, in relation to rebates of DIRT, the pertinent factor is age or incapacity. Only those over the age of 65 or those who are deemed to be permanently incapacitated, physically or mentally, are eligible to claim this back, either because their income does not exceed their exemption limit - £5,500 for a single or widowed person of 75 or over in the current tax year and double that for married couples - or under the terms of marginal relief, provided they qualify. Other people, who may still qualify for marginal relief, cannot claim a rebate in respect of DIRT.

Marginal relief is largely explained in the answer above. It can be activated provided your income does not exceed twice the relevant exemption limit, as you say. Whether it does or not depends on whether it would be of any use to you. If, having calculated your income and allowances, the tax office feels you would pay less money under marginal relief, it will put you on Tax Table Z, information about which will appear on the tax-free allowance certificate you receive annually. If the figures show you would pay more tax at the marginal rate, you will be left on your current rate and tax table. Of course, you can apply for marginal relief by filling in Form TFA1, available from your local tax office. In such a case, the tax office will examine the figures provided by you to see if they justify a switch.

In your case, I do not have enough details to say whether you would qualify for marginal relief or a DIRT rebate but I have to say I doubt it. To be certain, you would have to work out your whole gross income from all sources and your tax allowances, including age allowances, as described in the answer to the previous question. As to whether the limits on marginal relief are strict, the answer is yes. The idea of marginal relief is to help those taxpayers on lower incomes to pay less tax - those whose income is only "marginally" above the threshold. If the equation shows you would not benefit, either because your income is too high or your allowances not as high as certain other people, that is that.

In relation to getting information on marginal relief, you can certainly approach your local tax office or the central telephone information line at the Office of the Revenue Commissioners on 01-878 0000. Alternatively, I am sure an accountant would have the information close to hand.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, Fleet Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.