Parliamentary questions on the taxation of the PUP in 2021

Feb 22, 2021

Revenue provided information to the Minister for Finance, Pascal Donohoe TD, on the tax treatment of the Pandemic Unemployment Payment (PUP) in 2021 to assist with queries raised in the Dáil last week.

The Minister was advised as follows:

“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. It is not the case that the employee is taxed on the full year calculation of PUP, where a return to work has occurred during the year, with a requirement to seek a refund for the overpaid amount (as suggested in Deputy O'Dowd's question). This is purely a mechanism to reflect the fact that the person is in receipt of PUP. For a person who is in receipt of 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 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 published information on the taxation of the PUP at link: www.revenue.ie/en/life-events-and-personal-circumstances/pup-tax-liability/index.aspx, which may be of interest to the Deputies. Revenue has also very clearly set out how the taxation of the PUP and EWSS will occur in 2021.

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.

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.

Regarding the TWSS, it is important to note that any additional ‘top up payments’ made by employers to employees during 2020 under the TWSS were taxed in the normal (real-time) manner and are generally not included in the year-end arrangement. Top-up payments in addition to the basic subsidy would have very likely given rise to a tax liability, even if only paid over the course of 12 weeks. It was therefore wholly appropriate that PAYE operated in respect of such payments in the normal way as it is did for other earners through the period, with the deduction of income tax and USC in 2020.

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 and should be borne in mind.

If a single person is in receipt of the PUP from January 2021 to end of June 2021 before then returning to work (i.e. 26 payments of PUP at €350 per week = €9,100), the total outstanding tax due on the payments received at that point is approximately €170. By adjusting the employee’s tax credits while he or she is receiving the PUP payment, 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, 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 seeks to insure 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).”

Further information can be found in the Minister’s response to Parliamentary questions on 17 February.