Hundreds of thousands of people receiving the Pandemic Unemployment Payment (PUP) are in for a nasty shock if they return to work in 2021 – as they will have to pay all the income tax due on the payment this year.
Last year those getting the PUP were given the option to pay back their income tax bill over four years.
The change in tack by Revenue is set to put a massive financial strain on people getting the Pandemic Unemployment Payment as they are already under severe pressure to pay bills.
It means that anybody receiving the payment who gets their job back later this year will be hit hard. They will effectively lose tax credits, which will reduce the portion of their income that is tax-free.
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This means that despite them returning to work, the money they take home after tax will be significantly cut.
Couples that are jointly assessed, with one of them on the PUP payment, are also set to take a hit.
Close to 500,000 people will receive the PUP this week, according to the Department of Social Protection. All could be affected by the change, depending on if and when they return to work.
Revenue said it was regularising the situation where payments from the Department of Social Protection are taxable unless they are specifically exempt from tax.
“The process of taxing PUP payments in place for 2021 is in line with our standard and well-established processes and more importantly ensures any tax amount due on such payments are collected evenly and in manageable amounts over the course of the year to ensure there is no big tax bill at the end of the year,” it said.
The 2020 PUP payments were not taxed at source to ensure people experiencing negative economic disruption from Covid-19 could get payments as quickly as possible.
However, the fact that the tax will be collected this year will at least mean there is no tax liability for PUP recipients at the end of the year.
“Revenue confirmed to Chartered Accountants Ireland that the Pandemic Unemployment Payment is taxable in real time in 2021,” Norah Collender, professional tax leader at the accountancy body, said.
“This means that PUP payments will be factored into the tax credits and rate band of PUP recipients, and their jointly assessed spouses, to collect tax due on the PUP in 2021.”
It is different to the process for those who got PUP payments last year. They were given the option of spreading the repayment over four years, with a reduction in their tax credits over that period, a move that will ease the blow.
Meanwhile for those jointly assessed for tax, where one of the couple is on PUP, the working partner’s tax credits will be reduced to pay the tax in one year if the partner on the welfare payment has insufficient tax credits.
The PUP was established last March under legislation which deals with granting supplementary welfare allowance in cases of urgency.
PUP payments are subject to income tax but are not hit by Universal Social Charge (USC) or Pay Related Social Insurance (PRSI).
Other social welfare payments such as Jobseekers’ Benefit are also taxed.
With Jobseekers Benefit the first €13 per week of the payment is ignored for tax purposes but this is not the case with PUP and the full amount is taxed.
As PUP payments are among the highest weekly social welfare payments available, the tax bill is set to be high.
For someone getting the maximum PUP payment of €350 per week, the total payment for a full year will work out at €18,200.
Ms Collender said this would lead to a reduction of €70 a week in tax credits for someone on the standard income tax rate of 20pc.
In contrast, Jobseekers Benefit is €203 per week, or €10,556 for a full year.
If this is taxed on the same basis, it would result in a reduction in tax credits of €2,111 per year, or €40 a week.
She said where couples are jointly assessed, and the PUP recipient has insufficient tax credits, the spouse or civil partner’s credits will be cut to ensure the tax is collected.
