Making Cents: Working out if you will face a tax bill because of Covid-19 supports

The Government last week reminded anyone receiving the pandemic unemployment payment (PUP), put in place as an emergency response to layoffs made in the wake of the Covid-19 crisis, that they could be liable for a tax bill at the end of the year.
Making Cents: Working out if you will face a tax bill because of Covid-19 supports
Assistant secretary for social policy for the Taoiseach Liz Canavan confirmed the PUP is a "taxable source of income" during a media briefing on Covid-19. Photo:Gareth Chaney/Collins
Assistant secretary for social policy for the Taoiseach Liz Canavan confirmed the PUP is a "taxable source of income" during a media briefing on Covid-19. Photo:Gareth Chaney/Collins

The Government last week reminded anyone receiving the pandemic unemployment payment (PUP), put in place as an emergency response to layoffs made in the wake of the Covid-19 crisis, that they could be liable for a tax bill at the end of the year.

Assistant secretary for social policy for the Taoiseach Liz Canavan confirmed the PUP is a “taxable source of income” during a media briefing on Covid-19.

As of the day she said it, May 25, there were 579,400 receiving the payment.

News of a possible tax bill is worrying for them and thousands of others who received the payment before returning to work.

So I spoke to Joanna Murphy, CEO of Taxback.com, to ask how people can figure out whether they are likely to be affected.

“Revenue Commissioners have indicated that Covid-19 pandemic unemployment payment is a taxable source of income, but no further guidance was issued in this regard,” she says.

Given the lack of guidance at the moment, Ms Murphy suggests the most likely outcome is that PUP will be assessed as existing taxable social welfare benefits are.

“It could be assumed that Revenue will treat the new Covid-19 pandemic unemployment payment in the same way as other taxable benefits payable by the Department of Employment Affairs and Social Protection (DEASP),” she says.

“In general, DEASP payments are taxable sources of income, unless they are specifically exempt from tax.”

Such taxable payments are subject to income tax at the marginal rate (20%-40%), but not universal social charge (USC) or pay related social insurance (PRSI). What happens next depends on the information exchange between the department and Revenue.

“As with the DEASP jobseekers benefit, DEASP may give Revenue details of Covid-19 pandemic unemployment payments,” Ms Murphy said.

“The exchange of information between Revenue and DEASP takes place on a weekly basis, however, currently we are not seeing any Covid-19 pandemic unemployment payments reported on behalf of our clients who confirm they are in receipt of that payment.

“In general, with other DEASP payments, the tax is collected by reducing individual’s annual tax credits and rate band.

"When a person starts working again, Revenue issue a new tax credit certificate (TCC) showing the revised amounts, as well as amended Revenue payroll notification (RPN) available to the individual’s new employment, so employers can collect the correct amount of tax.

“When an unemployed individual applies for a current year tax refund (unemployment repayment), Revenue would take into account any taxable DEASP payment made on their behalf, before calculating the refund due.”

However, this could happen only if the DEASP has given details of PUP payments made to Revenue.

“If DEASP payments are not taken into account when a refund for unemployment is issued, Revenue will collect the underpaid tax from future employments by issuing amended RPNs,” Ms Murphy explains.

This would mean many people who received PUP could have lower tax credits for the remainder of the year and so see a reduction in their net pay.

But that does not necessarily mean people who received PUP will face additional tax.

“As with other taxable DEASP payments, Covid-19 pandemic unemployment payment should qualify for the employee tax credit,” Ms Murphy explains.

“If a taxable DEASP payment is a person’s main source of income, they may not have to pay tax at all, as the liability will be covered by their standard tax credits — the employee and personal tax credits.

“Any liability due on Covid-19 pandemic unemployment payments will depend on the individual’s personal circumstances, marital status, credit entitlements and amount and sources of income for the year in assessment.”

So while Ms Murphy is expecting additional guidance to be issued in relation to the additional tax consequences on PUP, individuals in receipt of payment can work out the likelihood of them owing by checking their current tax credits.

If you are a pay as you earn (PAYE) employee, you can check these through your online Revenue account or on a recent payslip. If your tax credits are higher than the amount of tax you will be due to pay on your income this year (both from wages and PUP), you will be unaffected.

For people with the standard personal tax credit of €1,650 and employee tax credit of €1,650 this amount is €16,500. As Mr Murphy explains, your tax credits are affected by personal circumstances.

But for a large number of the tens of thousands of people currently in receipt of PUP, if you earn more than that amount this year, you can expect a tax implication.

This also holds true for people whose employers are availing of the temporary wage subsidy scheme (TWSS), who could see an impact on their tax credits into next year and beyond.

“This is a scheme that enables employees to receive supports directly through employer’s payroll,” Ms Murphy explains. “The scheme is available to employers that have been affected by the Covid-19 pandemic.

“Revenue have indicated that income tax and USC will not be deducted through the payroll. Employee’s PRSI will not apply to the subsidy.

"As income tax and USC will not be collected through the payroll, any additional tax due will be collected on review at the end of the year.

“This means that it is likely that Revenue will calculate the additional tax and USC due on the payments before the end of year, and will, most likely, adjust employees’ credits for 2021/2022, so any additional tax due will be collected through future payrolls.”

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