Prior income will not escape new health levy

ANALYSIS:Government moves to ensure measures will not affect pre-May 1st redundancy payments

HIGHER HEALTH levies introduced in the emergency Budget will affect the tax liability of anyone who had received an exceptional payment in the first four months of the year in the same manner as the higher income levies, the Government confirmed yesterday.

However, there were growing indications last night that the Government will take steps in the forthcoming Finance Bill to ensure the measures do not adversely impact on people who took redundancy payments before the new rates are formally introduced on May 1st.

A spokesman for the Department of Finance last night said the legislation implementing the new health levies – which were doubled to 4 and 5 per cent in the Budget – would contain the same “composite blending” provision to ensure that all income earned in 2009 was treated the same whether it is earned through the PAYE system or outside it.

The measure will not have any effect on those PAYE taxpayers whose pay is spread evenly throughout the year. However, as currently proposed, it will affect PAYE earners who received a bonus in the first four months of the year. It is intended to ensure that people in a position to frontload their income in an effort to avoid higher levies will not succeed in doing so.

Tax specialists said yesterday that there was no history in Ireland of levies being backdated in the manner now being enforced by the Government,

The Government opted to increase levies rather than adjust income tax rates in the emergency Budget on the grounds that the levies are already in place and raising them requires a simple resolution. Adjusting income tax rates is considered more complicated and would mean a delay in the flow of the additional revenue to the exchequer.

The Institute of Chartered Accountants in Ireland (ICAI) said the Minister’s decision on implementation of the levies “created an air of uncertainty that needs to be dealt with”.

“This is our first experience of a retrospective tax applying. People work on the basis that taxes come into force on a certain date,” said Norah Collender. the ICAI’s tax technical manager

The decision to adopt a “composite blended” approach will also create problems later in the year. It means anyone in receipt of a bonus, a redundancy payment or other exceptional income will be entitled to be taxed at the “blended” rate for income and health levies rather than the new higher rate. However, companies are obliged to deduct tax at the higher rate in force at the payment date.

This means someone receiving a special payment after May 1st will be entitled to a tax refund.

Sean Quill, a tax specialist at benefits group Mercer, says this will cause major confusion, especially among PAYE payers in receipt of bonus or redundancy payments, because they are not used to filing annual returns.

“We have told the department that they need to be aware that not everyone files tax returns – most people in the PAYE system never have to,” he said. However, they will not be able to reclaim their overpaid levies without making a return.