The Covid-19 crisis could see many workers and unemployed individuals landed with unexpected tax bills – and others tying up loose ends so they’re not hit for tax unnecessarily.
t’s important therefore to understand – and deal with – any tax implications of the pandemic, particularly if your failure to do so could leave you seriously out of pocket. Here’s what you need to know.
YOU COULD FACE TAX ON THE PANDEMIC UNEMPLOYMENT PAYMENT
Those in receipt of the Pandemic Unemployment Payment (PUP) – which was put in place by the Government to support those who lost their jobs in the pandemic – could face a tax bill towards the end of the year.
“Generally speaking, most income is liable to tax, and the amount of tax an individual pays depends on the amount of the income they earn, their personal circumstances and the tax credits they are entitled to,” said a spokesman for the Revenue Commissioners. (Tax credits reduce the amount of tax you must pay on your income.)
“In the main, payments from the Department of Employment Affairs and Social Protection (DEASP) are taxable sources of income – unless they are specifically exempt from tax,” said Revenue. “The PUP is not exempt from tax and is a taxable source of income. Depending on an individual’s overall income during a year, the PUP may affect their overall tax liability for the year. The payment is not taxable at the time of receipt from DEASP – however, the individual will be liable for tax on the PUP amount received at the end of the year when Revenue automatically reviews their tax position. When an end-of-the- year review takes place for a PAYE taxpayer, it may be the case that they have unused tax credits which will cover any tax owing that may arise. Where a PAYE taxpayer owes tax, it is normal Revenue practice to collect any tax owing in manageable amounts by reducing tax credits for a future year or years in order to minimise any hardship. Furthermore, if an individual has any additional tax credits to claim, such as health expenses, this will also reduce any tax that may be owing.”
Details of PUP paid to individuals are usually reported directly to Revenue by the DEASP.
YOU MAY BE ABLE TO BOOST YOUR PARTNER’S TAKE-HOME PAY IF YOU LOST YOUR JOB
If you’re a couple who are jointly assessed for tax purposes and one of you has permanently lost your job, let Revenue know. You may be able to transfer your unused tax credits to your spouse or civil partner. This would increase your spouse or partner’s tax credits and reduce the tax they pay – which in turn should boost the amount of income he or she is bringing into the household.
YOU’RE LIKELY TO FACE A TAX BILL IF ON THE TEMPORARY WAGE SUBSIDY
The temporary wage subsidy scheme (TWSS) was put in place by the Government to limit job losses during the pandemic. Workers on the subsidy could find themselves on a lower wage in 2021 and for some years to come – as a result of a tax bill triggered by the subsidy. Although the temporary wage subsidy is liable to income tax and the Universal Social Charge (USC), it is not taxed through the PAYE system at the time it is received by the employee. “Instead the employee will be liable for tax and USC on the subsidy amount paid to them by their employer by way of review at the end of the year,” states Revenue in its guidance on the TWSS.
The tax bill you face on the temporary wage subsidy (if any) will largely depend on the number of tax credits you have left for 2020 – and the extent to which your wages have been taxed at the 20pc standard rate of income tax in 2020, according to Norah Collender, professional tax lead with Chartered Accountants Ireland.
“If an individual has already worked throughout 2020 and returns to work after receiving the temporary wage subsidy (as is the aim of the scheme), they will already have used up much of their tax credits and standard rate band [the portion of income taxed at the 20pc rather than 40pc rate of income tax],” said Collender. “So for a higher-rate taxpayer, that will mean they’ll likely be subject to 40pc tax on the TWSS. Any single person who has earned €16,500 already in 2020 – outside of the TWSS -will have used up all of their employee tax credits for 2020, though that individual would need to have earned €35,300 over the year to have used up their standard rate tax band.”
As with the PUP, the tax you owe as a result of the TWSS may be covered by any unused tax credits you have. Otherwise, Revenue is likely to collect any tax owed by reducing your tax credits over the next year or years.
So how much of a tax bill could the TWSS trigger? “If you take a single individual who earns €20,000 over 2020, and on top of that, they also get a temporary wage subsidy of €3,600, that €3,600 will generate a possible tax bill [including income tax and the USC] of around €750,” said Collender. “Once you go over earnings of €35,300 in 2020 and are single, you are in the higher income tax bracket of 40pc – so if you get a wage subsidy worth €4,200, the tax bill would be about €1,900 (including USC and income tax). Employees should go over their payslips and get a handle on how much tax they’re facing on the subsidy – as it is likely to impact your take-home pay for a number of years to come.”
HAVE YOU PROOF YOU HAVEN’T USED YOUR COMPANY CAR TO AVOID UNNECESSARY TAX
On-the-job perks are known as benefit-in-kind (BIK) – and as these benefits have a monetary value, they must usually be treated as taxable income. Income tax, PRSI and the USC must typically be paid on the value of the benefit – if it’s a taxable benefit. Company cars are a type of BIK – but for most workers with a company car, there will have been little (if any) benefit to having that car during lockdown as it is likely to have been parked up for the last few months.
Unless your boss took back possession of the car during lockdown, to avoid getting hit unnecessarily for BIK tax, your boss should prohibit your private use of the car – even though it stays in your possession. “Records should be maintained to show that the employer has prohibited its use [such as an email or other communication from your employer] and that no such use has occurred [such as photographic evidence of odometer],” said Revenue in Covid-19 advice for taxpayers.
“Your employer should be adjusting the BIK on your salary to take account for the fact that the car isn’t being used,” said Collender. “Make sure your boss has made the necessary BIK adjustments. You should keep a record of the mileage on the car to show that you haven’t been using the company car for personal use.”
The usual BIK tax applies if you have continued to use a company car throughout lockdown.
CHECK PENSIONS TAX RELIEF BEFORE MAKING ANY TOP-UP PAYMENTS TO RETIREMENT FUND
Many workers have been unable to contribute to their pensions since the Covid-19 crisis erupted – due to being laid off, having had their pay cut or being on the temporary wage subsidy. Should you be one such worker – and you try to make up for the lost contributions to your pension by saving extra into it when you return to work (assuming you haven’t lost your job permanently) – don’t save more into your pension than you can claim tax relief on.
You can typically pay between 15pc and 40pc of your earnings into your pension and get tax relief on those pension contributions, depending on your age. “If your relevant earnings [for the purposes of pension tax relief] are down, you are restricted in terms of the amount of tax relief which you can claim,” said Collender.
Workers on the temporary wage subsidy should consider making a top-up payment to their pension towards the end of the year (if they can afford to) to make up for the lost pension contributions while they were on the subsidy.
“Under the TWSS, the employer is precluded from deducting pension contributions from the TWSS – but at the end of the tax year, that TWSS is qualifying earnings for the purpose of pension tax relief – so you could consider making a top-up pension payment,” said Collender. “It will be up to the individual to review their pension contributions at the end of the year and to make a top-up if they feel it necessary.” As pensions are one of the most tax-efficient ways to save, do make up for lost time on pensions – if you can.
TAX RELIEF & REFUNDS
YOU MAY GET TAX RELIEF FOR WORKING FROM HOME
There are a number of tax breaks in place for remote workers which you should claim if you have worked from home throughout the Covid-19 crisis. There is a small e-worker tax-free allowance of €3.20 a day which employers can pay to their employees to cover the additional costs associated with working from home.
Employers are not legally obliged to pay this allowance though.
“A lot of employers can’t pay the €3.20 e-worker allowance due to their own financial difficulties [as a result of the emergency],” said Norah Collender, of Chartered Accountants Ireland. You can claim tax back on work-related expenses yourself — if your employer doesn’t provide the e-worker allowance. Most of the work-related expenses you incur when working from home will be around heating, electricity, phone calls and broadband.
The rate of tax relief which can be claimed can be up to 40pc, depending on whether or not you pay the higher rate of income tax. You can only claim tax relief for the proportion of costs that relate to your time working from home. “Be sure to claim for an acceptable level of electricity, heating and bills,” said Collender.
Under guidance from the Revenue Commissioners, about a tenth of the cost of such bills can be claimed back in tax — if those costs are incurred “wholly, exclusively and necessarily” in the performance of your work duties. Keep receipts for any expenses incurred when working from home as you will need these to support your claim for tax relief.
Be aware that if your boss pays you a daily allowance to cover your remote working expenses, you may have to pay tax on that allowance — depending on how high it is. “If you are getting a daily allowance from your employer [for working from home], any more than €3.20 a day [the tax-free rate you are entitled to under the e-worker allowance] will be subject to PAYE taxes,” said Collender.
Should your boss provide you with work equipment so you can work from home, the provision of that equipment won’t trigger any tax bill for you as long as private use of it is minimal.
YOU MAY GET ATAX REFUND IF YOU LOST YOUR JOB
You may be entitled to a tax refund (known as an unemployment repayment) if you paid either income tax or the USC (or both) this year — and you then lost your job.
You can claim the refund immediately if emergency tax was applied in your last job, immediately if you are leaving Ireland permanently, four weeks after becoming unemployed if you are not receiving any other taxable income, or eight weeks after becoming unemployed if receiving other taxable income (such as the PUP).
To claim the refund, sign in to myAccount (a Revenue online service) and select ‘Claim unemployment repayment’ on the PAYE Services card.
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