Was tax bill on Covid subsidy payments a misstep by Government?
Hundreds of thousands of subsidy recipients will find out on Friday how much they owe
In August, Minister for Finance Paschal Donohoe said it simply wasn’t possible to give an estimate of how much someone might owe. Photograph: Nick Bradshaw
When the State subsidy schemes to help employers cope with the pandemic were first drawn up back in March 2020, who could have foreseen the situation we’re now faced with?
By January 2021, the thinking must have gone, Covid would be a distant memory, the country would be back in business and so the delivery of tax bills into people’s inboxes would have been seen as an acceptable price to pay for the storm that had been weathered.
Far from conquering Covid, however, we’re now closer to its eye than ever before, and many of those who have benefited from schemes such as the pandemic unemployment payment and the temporary wage subsidy scheme, are probably even more fearful for their futures than they were some months ago.
Not the best time, then, to be hitting those who have arguably suffered the most (economically) from the pandemic with tax bills. And yet that’s what hundreds of thousands of workers, some of whom have been out of work since March, will be likely to get on Friday.
The reason for the impending tax bills is because when the payments were made during the year, they were not taxed. Rather, income tax and the universal social charge, where applicable, would instead have to be settled at the start of 2021.
In effect, the application of the temporary wage scheme meant that the 660,000 or so employees who benefited from it actually received pay cuts last year.
But no one told them.
Yes, government gave your employer up to €410 a week to plug the hole in the payroll, but the net benefit to you would have been substantially less if this money had been taxed. A higher-rate taxpayer, for example, would have given up almost half in tax, or about €198, so their pay would have been “cut” by almost €800 a month.
But it wasn’t, and now Revenue is coming calling for this shortfall.
Very few will actually have to hand over cash any time soon; those with shortfalls will be given the option of having their tax credits adjusted for four years from January 2022. And if you’re self-employed, you won’t be paying tax for 2022 until November 2023.
But think about that for a minute; while the rest of the country is (hopefully) enjoying a postwar-type boom, those who benefited from the subsidies will only be starting to pay for them.
Consider a chef in a hotel who benefited from the TWSS before being placed on the PUP. In 2021 she’s told her job no longer exists, and as the PUP has finally finished, she applies for jobseeker’s benefit. After some time, the economy picks up and she gets a job again, in mid 2022. Excited to get her first pay cheque in quite some time, she’s surprised when sees the deductions. It’s 12 months on from the pandemic and she’s still paying the price.
Could it have been different? Ideally, perhaps, tax would have been deducted at source, particularly for the TWSS, and so employees receiving it would have taken a hit to their take-home pay – but this could have been offset at the time by lower living costs.
But the schemes had to be created with haste, and so talking of ideals is perhaps unfair.
Since then, however, opportunities have arisen for clearer guidance to have been given on the issue, so that people could perhaps set aside the shortfall and clear their tax bill this January, rather than having to carry the debt forward for up to four years.
It is said that the cornerstones of a good tax system are certainty, simplicity and stability, but this has been an exercise in uncertainty. In August, when a signal on potential liabilities could have been beneficial, Minister for Finance Paschal Donohoe said it simply wasn’t possible to give an estimate of how much someone might owe – or whether they would face a tax bill at all.
Not only that, but to date government has made a big deal out of telling people that any bills arising will be negligible, due to the fact that people can offset these liabilities with tax credits. But these days, tax credits are few and far between. For example, medical expenses of €1,000 will give rise to a taxback of just €100 if a person has already claimed half of the amount back through their health insurer. And how many people are likely to be able to claim the stay-and-spend credit given the closure of restaurants for much of autumn?
Money Guide Ireland has a helpful table that shows how much you might owe; in general, the more you earn, the more you’ll owe. When it comes to the TWSS, for example, tax owed will probably work out at 20-40 per cent of total payments received, with the higher figure incurred by those on the higher tax rate. On earnings of €67,500, for example, someone who got the TWSS topped up by their employer could face a bill of about €2,837. Conversely, however, some may find that they are actually owed money. If their employer cut their salary to the level of the TWSS, and didn’t top it up, then they might actually be due a refund, according to figures from Taxback.
With respect to the PUP, those who earned less than €16,500 last year (either from wages and/or PUP) will probably face no tax bill, while those who earned more than this might.
So government could have given some guidance on this earlier.
It’s not the only time Revenue, as an agent of government, got it wrong. Back in 2012, almost out of the blue, Revenue wrote to 115,000 pensioners telling them that they might owe tax on their State pension. Most shortfalls were modest, amounting to a weekly tax take of €5-€8, but the fear it engendered created a significant backlash.
The Government will be hoping that on Friday, and in the weeks and months to come, as employees come to learn about their tax situations, there is no similar outcry.