I am advised by Revenue that employers are legally obliged to deduct Income Tax, Universal Social Charge (USC) and Pay Related Social Insurance from the emoluments of their employees. Any recoupment of overpaid salary by an employer from an employee is a matter between the employer and employee, including in relation to the timing and amounts of any repayments by the employee. However, the employer has obligations under tax law in this area and these obligations are not negated because of an overpayment of salary and the arrangements made to recoup the overpayment. In that context, it is important to note that the correct pay and tax details of an employee for a tax year must be on record, not only for the purposes of determining the employee’s tax liability, or eligibility for a tax refund, for the tax year in question, but also for the purposes of establishing entitlement to certain grants and means tested payments.
Revenue published guidance in the form of a Tax and Duty manual in August 2018, which set out Revenue’s position regarding the recoupment of an overpayment of emoluments by an employer from an employee
https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-70.pdf. There was no change to Revenue policy in this area; this manual simply clarified Revenue’s position regarding overpayment of salary, as it had come to its attention that certain employers were operating outside of the underlying law in the Taxes Consolidation Act (TCA) 1997 and the Income Tax (Employments) Regulations 2018.
The applicable tax treatment regarding overpayments depends on whether the staff member makes the repayments in the current tax year, that is, the year to which the overpayment relates, or in a subsequent tax year. Where the overpayment is being recouped by means of a deduction from emoluments in the current tax year, the gross amount of the overpayment is simply deducted from gross emoluments. This has the effect of correcting the employee’s Income Tax, USC and PRSI record in the current year.
Where the overpayment is being recouped by means of a deduction from emoluments paid in a later year, the gross amount of the overpayment must be deducted from the net pay. Clearly, in certain situations, overpayments may be recouped over several years. Revenue will grant a refund of any tax or USC only when the overpayment relating to the tax year has been repaid, regardless of the amount of time it takes to recover the overpayment.
Section 865 of the TCA 1997 imposes a statutory 4-year time limit for making a claim for repayment of tax, USC and PRSI. Where the gross overpayment made by the employer is recouped from the net pay of the employee within the 4-year time limit from when the overpayment was made, then the individual has the opportunity to claim any tax overpaid back from Revenue within the statutory time limit. Moreover, in situations where an overpayment will not be recouped by the employer for more than 4 years, while Revenue must apply the statutory 4-year time limit for making a claim for repayment of tax, where an individual employee makes a valid claim for the tax year relevant to the overpayment (e.g. a claim relating to the year 2018 must be made by 31 December 2022), but the overpayment will not be totally recouped from him or her until sometime thereafter, Revenue can make the refund at a later date but only after the overpayment has been repaid in full to the employer.