Vol. 488 No. 1
29 Mrs. B. Moynihan-Cronin asked the Minister for Finance if his attention has been drawn to the hardship and friction the current method of taxation of social welfare payments is causing in many households when the main earner is issued with a substantial tax bill at the end of the financial year. [2872/98]
It is a general principle of taxation that, as far as possible, income from all sources should be subject to taxation. In line with this principle the majority of social welfare payments are, therefore, reckonable as income for tax purposes. Treating such payments as income for tax purposes is essentially a matter of equity. Long-term social welfare payments have been taxable for many years. Taxation was extended to disability benefit, DB, and unemployment benefit, UB, in 1993 and 1994 respectively.
The extent to which taxation actually arises in a given case depends, of course, on the amount of other income the social welfare recipient, or the recipient's spouse, has in the particular tax year. If there is no other income in addition to the social welfare payment, the exemption limits and allowances can normally be expected to ensure that there is no tax to be paid on the social welfare income itself.
Taxable social welfare payments are paid gross by the Department of Social, Community and Family Affairs, i.e. without tax being deducted. The method of taxing long-term social welfare payments is that an amount equivalent to the annual social welfare payment is deducted from the taxpayer's full tax-free allowances at the start of the tax year, thereby avoiding a build up of arrears.
I am informed by the Revenue Commissioners that in the case of short-term DB and UB it is not possible, in certain instances, to avoid a build up of arrears of tax occuring at the end of tax years. In the case of persons with tax-free allowances lower than the taxable amount of DB or UB, a tax liability is generated on the excess of the taxable benefit over the tax-free allowances for each week the person is in receipt of DB or UB. This would mainly affect married couples where the couple's tax-free allowances, other than the PAYE allowance, are allocated to one spouse. If the spouse, who is eligible for short-term DB or UB, ceases or returns to employment the only tax-free allowance available to that spouse is the PAYE allowance of £800. It would not be possible to collect the tax due during the year in those circumstances and the matter must be deferred until after the end of the year.
When arrears of tax do arise at the end of a tax year the Revenue Commissioners adopt a sympathetic approach with regard to the collection of such arrears. Normally the payment of the arrears can be spread over a number of years.
Taxation at source by the Department of Social, Community and Family Affairs of such payments would, of course, avoid the build up of tax arrears. However, in October 1995 the previous Government decided to defer plans for the introduction of taxation at source of short-term social welfare payments for the reasons explained by my colleague, the Minister for Social, Community and Family Affairs, in his reply to the Deputy of 4 February 1998.
