Covid-19 wage subsidy schemes: Prepare for a possible tax liability in the new year

Just when you thought things couldn’t get worse, it looks like they might. Wage subsidies that were introduced earlier this year to help embattled employers cope with seismic reductions in revenues, while still paying their employees, have a hidden sting in the tail for those employees – unexpected tax liabilities.

The Revenue Commissioners have now embarked on a compliance programme for these subsidy schemes, getting all the relevant information from employers. It says it is going to inform all affected taxpayers – which could number as many as one million – just what their tax liability, if any, is this January.

But for hundreds of thousands of taxpayers across the State, what will this mean?

Back in March, the Government moved to protect employees – both those who had already lost their jobs and those at risk of doing so – from the economic threat of the Covid-19 pandemic. It introduced the pandemic unemployment payment (PUP) and the temporary wage subsidy scheme (TWSS).

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The PUP is a social welfare payment which was initially paid at a top rate of €350 a week (and this has increased again since October 16th) to both employees and self-employed people who had lost all their income due to Covid-19.

The TWSS was a subsidy from the State to employers who kept their employees on the payroll throughout the pandemic, and was initially offered up to a maximum of €410 for each qualifying employee. It has since been replaced by the employment wage subsidy scheme (EWSS).

Figures from September show that more than 660,000 people received at least one payment via the TWSS, while some 600,000 others have received the PUP

While both schemes were and still are very much welcome, they were put together in haste, which means that both have led to outstanding tax issues. This is because income tax and the universal social charge was not applied to the subsidy through the payroll – ie via your employer – in the way it usually would be for PAYE workers. As the tax wasn't deducted at source, according to Marian Ryan, consumer tax manager with Taxback. com, it leaves outstanding liabilities.

Some confusion

While Revenue was clear from the start that there would be a tax implication with the subsidies – and it has been repeated since – it has nonetheless led to some confusion, says Norah Collender, professional tax leader with Chartered Accountants Ireland. Many taxpayers are entirely unaware of what January might hold for their bank balances.

Back in September, Minister for Finance Paschal Donohoe said he expected that any tax liability that does arise will be "small". Collender isn't so sure.

“The messaging so far has been ‘it’s not going to be a lot of money and not going to be a big burden’. But from our workings on it, there is a liability arising and it won’t be easy for people to comprehend,” she says.

And it could affect a large cohort of workers. Figures from September show that more than 660,000 people received at least one payment via the TWSS, while some 600,000 others have received the PUP.

If you have benefited from such a scheme, how much will you owe?

According to Revenue, all PAYE taxpayers will get a Preliminary End of Year Statement in their online MyAccount from January 15th, 2021. It will show the amount of TWSS and/or PUP payments that you received. It will also show if you have paid the correct amount of tax and USC for the year.

Revenue last week published a list of employers who availed of the scheme. It will publish up-to-date lists at the end of January and April 2021.

It says that when this review of Covid payments takes place, "an employee's unused tax credits may be enough to cover any tax liability". Indeed in some cases, it may actually result in a tax refund being due.

However, this is more likely to benefit those who received PUP, as such beneficiaries may have been out of work for some time, and so have a better chance of unused tax credits from the 2020 tax year wiping out their bills. In addition, as a social welfare payment, PUP is only subject to income tax, not the USC.

Rough estimate

Those who received the TWSS may fare worse. First, they have less of a chance of credits wiping out their liability – see above – while the payment is also subject to USC, as well as income tax.

But if your employer availed of the TWSS scheme, how much might you owe?

Well, according to Collender, it’s not such an easy question to answer.

“It’s very difficult to work out, but in general it depends on individuals’ personal circumstances, whether they are jointly assessed or single, for example, and how long they were on the TWSS.”

She does note that the average payment was about €280 a week and, as of the end of August, when it was replaced by the EWSS, some 58 per cent of workers had been on the TWSS for 17 weeks.

Taking this average as an example would give rise to untaxed income of some €4,760. Once income tax and USC are deducted (PRSI doesn't apply), it could mean a tax bill of about €1,167.

Taxback’s Ryan suggests that someone earning €38,000, who received TWSS with an additional top-up from their employer to bring their takehome pay up to what it usually was, could find themselves with an extra bill of about €1,592. And this underpayment can also be exacerbated for people who found their income falling as a result of the subsidy schemes.

While employees will get their statement of liabilities early next year, they won't be expected to make up the difference any time soon

To get some sense on how much you owe, Collender suggests you look at your payslips and watch out for “GovCov19 WageSub” . The longer you received the subsidy, the more you may be liable for in tax.

However, these wage slips may not indicate how much of your pay came from the subsidy, as employers are currently working on a “reconciliation” process to give Revenue the information it needs to prepare its end of year statements.

“There is a significant paperwork burden associated with the TWSS for employers,” she says.

While employees will get their statement of liabilities early next year, they won’t be expected to make up the difference any time soon.

According to Revenue, employees will be given the opportunity to fully or partially pay any income tax and USC liability through the Payments/Repayments facility in MyAccount. But they don’t have to do so.

Tax credits

Revenue will also collect the liability, interest-free, by reducing the employees’ tax credits over four years to minimise any hardship. The reduction of tax credits will start in January 2022.

Of course, opting for this will result in a reduction in take-home pay over those years as you won’t have use of those tax credits to reduce your ongoing tax bill on income from those years.

Someone with an outstanding liability of €1,300, for example, might lose about €325 a year over the four years, or about €27 a month. And this could be compounded by any increases in the personal tax burden – depending on the State’s financial position and budget choices – over this time period.

Speaking on the issue back in September, the Minister for Finance alluded to the fact that taxpayers could look at reducing their outstanding liabilities by claiming tax back through various schemes such as medical expenses.

You can do this once you get your end-of-year statement from Revenue, as you will then be invited to file a tax return, something which Revenue says can be done in "five easy steps", as much of the data on the form will be pre-populated.

This tax return allows you to claim additional tax credits, reliefs and expenses, such as health expenses, the Stay and Spend tax credit, college fees or e-working expenses, which can be used to offset any liabilities.

So don't get your hopes up that claiming e-worker relief, or Stay and Spend, will do much to wipe out your bill

Typically, in normal times, doing this would have garnered you a tax rebate. Last year for example, Revenue says that of some 755,000 returns filed, 72 per cent got money back. The total refunded was almost €365 million, or an average of €667 each.

Medical expenses

Just 12 per cent of filers owed additional money, some €17.7 million, or €193 apiece on average.

This year, of course, any such rebates may go straight back to Revenue to meet this PUP/TWSS tax bill rather than into your bank account. And taxpayers are being warned that filing such a return and claiming all eligible credits may not be enough to wipe out liabilities.

As Ryan notes, “you’d need a lot of medical expenses to clear it”.

Indeed, Collender puts the figure required at about €5,835 in medical expenses to wipe out a tax bill of about €1,200, given that you only get relief of 20 per cent on such expenses.

So don’t get your hopes up that claiming e-worker relief, or Stay and Spend, will do much to wipe out your bill. “Depending on any kind of excess credits, or available tax reliefs that you haven’t claimed is not going to be practicable or applicable,” she says.

There is, however, potentially a better solution for employees; if their employers absorb these tax liabilities on their behalf.

Normally such a move would trigger taxable benefit-in-kind, which would mean that the employee would just end up with a different kind of tax bill. According to Collender, however, Revenue has intimated that benefit-in-kind may not apply if an employer pays the TWSS liability on behalf of an employee.

“An opportunity is there for employers to pay it on behalf of employees,” she says, although the Revenue has yet to clarify this.