Illustrate your understanding of the term "Taxation Credit" - Leaving Cert Business - Question 3 - 2004

A taxation credit is a sum that reduces the amount of tax owed to the government. Unlike deductions, which lower taxable income, tax credits directly decrease the tax liability on a dollar-for-dollar basis.

Tax credits were introduced to replace Tax Free Allowances in 2001. Under the tax credit system, taxpayers may qualify for various credits based on personal circumstances. For instance:

• A married person's tax credit
• An employee's (PAYE) tax credit

These credits are particularly beneficial as they effectively reduce the tax calculated on an individual's gross pay.

It's important to note that tax credits are non-refundable, meaning they can only reduce the tax owed to zero, but they do not result in a refund if they exceed the tax liability. The formula for determining tax payable is:

$\text{Gross Tax} - \text{Tax Credits} = \text{Tax Payable}$