The Pandemic Unemployment Payment (PUP) is a social welfare payment for workers who have become unemployed due to the COVID-19 pandemic. PUP payments are classified in legislation as income supports and are subject to income tax. The taxation arrangements for the PUP were legislated for in Finance Act 2020 which reflects the standard approach to taxation of social welfare type payments, which means they are liable to income tax but exempt from the Universal Social Charge (USC) and Pay Related Social Insurance (PRSI).
The PUP along with the Temporary Wage Subsidy Scheme (TWSS) were introduced in March 2020 as emergency measures to deal with the impact of the COVID-19 pandemic on the economy. The Government objective at that time was to get much needed assistance to employees as quickly as possible. To meet that objective, both subsidies were not taxed in ‘real-time’ in the normal manner, meaning the collection of any tax due was deferred until year end. This approach was based on an expectation at the time that the emergency supports would be short-term in nature, which turned out to not be the case due to the continued prevalence of COVID-19.
The replacing of the TWSS with the EWSS from 1 September 2020 and the continuation of both that scheme and the PUP into 2021 has re-established the practice of operating PAYE in the normal (real-time) manner for such payments. However, those people receiving PUP payments in 2021 will only pay tax when they return to work. The mechanism to tax PUP payments is by reducing the recipient’s tax credits and rate bands. Revenue has published information on the taxation of the PUP at the following link
which may be of interest to the Deputy.
When a PUP recipient returns to work, he or she should immediately cease the PUP claim with the Department of Social Protection (DSP). In turn, DSP will notify Revenue that the payment has ceased, and Revenue will then adjust the employee’s tax credits accordingly. For a person in receipt of the PUP at the start of the year, the weekly amount is annualised on the Tax Credit Cert (TCC), with knock on impacts on the tax credit and standard rate cut off point, as if that person will be on the PUP for the full year. When the person comes off PUP, the TCC is amended to reflect the fact that the payment has ceased. A revised instruction (Revenue Payroll Notification) will issue to the relevant employer to reflect the updated position and the revised TCC will issue to the employee via the online myAccount service.
Revenue has confirmed to me that income tax is normally calculated using the ‘cumulative basis’, which means that for each pay day, all earnings and all tax credits are accumulated, and the tax due is calculated on a year to date basis. This ensures employees pay the correct amount of tax as it falls due. In exceptional circumstances, employees may be placed on the ‘Week 1’ basis (also known as the ‘non-cumulative basis’). This normally occurs where there is a large reduction in tax credits that could cause financial hardship or where there is a lack of information on prior employments within the current tax year. Where employees are placed on a ‘Week 1’ basis, income tax is deducted on a pay-period to pay-period arrangement, without reference to previous pay or tax paid. As such, the employee will not suffer a large deduction of tax in a pay-period but will also not receive any refunds that might be due until the ‘cumulative basis’ is implemented. These normal taxing arrangements are operating in respect of PUP payments received by employees in 2021 and are in accordance with the legislation as set down.
Specifically, regarding the taxation of PUP, the following points are also relevant:
- A single person currently in receipt of the PUP will continue to receive the payment gross and tax is not collected from these payments until s/he returns to work. This is also the case where both married spouses/civil partners are receiving PUP;
- 50% of all PUP recipients are not on the highest rate of €350 per week. A single person’s weekly tax credits will fully cover any tax due on weekly PUP payments at the €203, €250 and €300 payment rates. For these rates, the employee will in fact have excess weekly tax credits of between €3.46 and €22.86 which will build up for the period s/he is out of work. This means that the employee will have additional tax credits to offset against income when s/he returns to work;
- For a single person in receipt of PUP of €350 per week, his/her weekly tax credits cover 90% of the tax payable, leaving tax due of approximately €6.50 per week.
- USC is not chargeable on PUP payments which will either fully or partially offset any tax impact on overall net wages.
Revenue advise me that, for example, if a single person is in receipt of the PUP from January 2021 to end of February 2021 before then returning to work (i.e. 8 payments of PUP at €350 per week = €2,800) the total outstanding tax due on the payments received at that point is approximately €52. By adjusting the employee’s tax credits, as outlined above, this, eliminates or reduces any liability at year end. Any such liability will also be fully or partly offset by the reduction in the total USC liability for the year because, as explained above, PUP payments are not liable to USC. In effect, this means that in most cases the net take home pay of PUP recipients that return to employment will be unaffected by the taxation measures.
The position for married couples/civil partners is slightly different. Where a couple is taxed under joint assessment and one spouse or civil partner is in receipt of the PUP but does not have sufficient tax credits to cover the tax due, the tax credits of the working spouse or civil partner are reduced to ensure that the balance of the tax is collected during the year. Effectively, the personal tax credit of the PUP recipient is not assigned to the working spouse in the usual manner as it is instead allocated to the excess PUP amount over and above the (PUP) recipient’s PAYE tax credit and rate band.
Finally, Revenue further advise me that in taxing PUP payments in accordance with the legislation, Revenue is seeking to ensure, as far as possible, that people do not end up with a tax liability at the end of 2021 that will have to be paid in future years, particularly where there is already an underpayment in respect of 2020. The alternative ‘year-end’ approach would result in employees having further underpayments in the years ahead in addition to their 2020 liabilities, which could cause financial difficulties for them down the road. The normal deduction arrangements now applying to both EWSS and PUP for 2021 insures against this, as tax credits are set aside for offset against any tax due. The arrangement also ensures an equity of tax treatment between those receiving the PUP and employees who are working and receiving similar levels of wages (although the person on PUP will have a lower USC liability).