Problems with employees Tax Credits being reduced to Zero
Updated Employee RPNs
As many of you are aware Revenue issued a large number of employees with updated RPNs at the end of January.
In many cases the employees have seen their tax credits greatly reduced or set to zero and this has caused much confusion for employees and employers alike.
Revenue have given us an explanation as to why this is happening.
Background
Many social welfare benefits such as Job Seekers, Illness Benefit, Maternity Benefit and the Pandemic Unemployment Payment (PUP) are subject to PAYE.
Normally such benefit payments are taxed in real time as they are being paid to the employee via a reduction in the person’s tax credits.
During 2020 the PUP payments were not tax in real time and instead the PAYE liability has been calculated at the Year End via the employee’s End of Year Statement on MyAccount.
However, in 2021 PUP has moved to being calculated in real time as the payments are being made to the employees.
How is PAYE Calculated for PUP in real time?
When Revenue are calculating the tax due on social welfare payments such as PUP they will base their calculation on an assumption that the employee will be in receipt of the benefit for 52 weeks.
They will then perform a calculation of how much PAYE would be deducted on the benefit over those 52 weeks and they then reduce the employee’s annual tax credits by that amount.
This is how they have always operated on benefits such as Job Seekers, Illness and maternity benefit.
The problem is that the amount of these benefits is usually much lower than PUP.
For example, Job Seekers Benefit is €203 per week whereas PUP is €350 per week.
The weekly PAYE liability on Job Seekers benefit is €203 @ 20% or €40.60 per week – this is usually well covered by the employee’s tax credits.
However, for PUP the employee might be on €350 per week which results in a PAYE liability of €70 per week. In many cases this is more than the employee’s weekly tax credit.
Hence the employee’s tax credits have been reduced to zero.
Why have Revenue done a calculation over 52 weeks?
While an employee is on a social welfare benefit Revenue have no idea how long they will be on it for, so that is why they assume that it will continue for the rest of the year.
When an employee finally goes off the benefit and goes back to work then Revenue perform a balancing calculation to see how much PAYE was due on the actual amount of benefit received and any balance of tax credits are restored to the employee’s RPN so that they can be applied to their employment.
But my employees started back to work this week and their credits have not been restored?
This is because of the timing of how a PUP claim is closed.
Social Welfare entitlement are based on a week beginning on a Friday and ending on the next Thursday. If you close your PUP claim to return to work and have at least one qualifying day in that period you will receive a full PUP payment for that week. See the Social Welfare Website for more details here>>
So, for example. If you have an employee who recommenced work this Monday and had notified social welfare of their return to work then they will still receive a PUP payment for this week because technically they were entitled to the benefit for the previous Friday. The fact that they are working and in receipt of a wage this week will not disqualify them for the PUP payment.
This employee should receive a social welfare payment along with their wage payment in the same week.
In this case as far as Revenue is concerned the benefit is still active and the tax credits will remain at zero.
In the following week the closure of the PUP claim should make its way through the systems and the remaining tax credits should be restored. For some small number of cases this might fall into the 3rd week before tax credits are restored.
But I have an employee who is not on PUP and his credits have been reduced?
This will happen in cases where an employee is jointly assessed for PAYE and their spouse has been receiving PUP in 2021, but the reduction in tax credits very much depends on how they have been allocated between the couple.
What do I tell my employees?
For the vast majority of employees the zero tax credits will be offset by the fact that they will still receive a PUP payment from Social Welfare, so while it might appear to be unfair, its just a matter of timing and they should not be out of pocket.
Is this going to continue into the future?
Yes, in short it will.
There are currently 479,000 employees in receipt of PUP, and all of them who have an active employment will have had their tax credits greatly reduced (or eliminated) in the RPN update of 31st January.
As these employees come back to work over the coming months they are going to be faced with the same issue of having greatly reduced tax credits for the first few weeks when they return to work.
It is important to emphasise that in most cases the employees should continue to receive a PUP payment for the first week or two after they have recommenced their employment, and that their tax credits will be recalculated when the closure of their PUP claim has been completed.
As many of you are aware Revenue issued a large number of employees with updated RPNs at the end of January.
In many cases the employees have seen their tax credits greatly reduced or set to zero and this has caused much confusion for employees and employers alike.
Revenue have given us an explanation as to why this is happening.
Background
Many social welfare benefits such as Job Seekers, Illness Benefit, Maternity Benefit and the Pandemic Unemployment Payment (PUP) are subject to PAYE.
Normally such benefit payments are taxed in real time as they are being paid to the employee via a reduction in the person’s tax credits.
During 2020 the PUP payments were not tax in real time and instead the PAYE liability has been calculated at the Year End via the employee’s End of Year Statement on MyAccount.
However, in 2021 PUP has moved to being calculated in real time as the payments are being made to the employees.
How is PAYE Calculated for PUP in real time?
When Revenue are calculating the tax due on social welfare payments such as PUP they will base their calculation on an assumption that the employee will be in receipt of the benefit for 52 weeks.
They will then perform a calculation of how much PAYE would be deducted on the benefit over those 52 weeks and they then reduce the employee’s annual tax credits by that amount.
This is how they have always operated on benefits such as Job Seekers, Illness and maternity benefit.
The problem is that the amount of these benefits is usually much lower than PUP.
For example, Job Seekers Benefit is €203 per week whereas PUP is €350 per week.
The weekly PAYE liability on Job Seekers benefit is €203 @ 20% or €40.60 per week – this is usually well covered by the employee’s tax credits.
However, for PUP the employee might be on €350 per week which results in a PAYE liability of €70 per week. In many cases this is more than the employee’s weekly tax credit.
Hence the employee’s tax credits have been reduced to zero.
Why have Revenue done a calculation over 52 weeks?
While an employee is on a social welfare benefit Revenue have no idea how long they will be on it for, so that is why they assume that it will continue for the rest of the year.
When an employee finally goes off the benefit and goes back to work then Revenue perform a balancing calculation to see how much PAYE was due on the actual amount of benefit received and any balance of tax credits are restored to the employee’s RPN so that they can be applied to their employment.
But my employees started back to work this week and their credits have not been restored?
This is because of the timing of how a PUP claim is closed.
Social Welfare entitlement are based on a week beginning on a Friday and ending on the next Thursday. If you close your PUP claim to return to work and have at least one qualifying day in that period you will receive a full PUP payment for that week. See the Social Welfare Website for more details here>>
So, for example. If you have an employee who recommenced work this Monday and had notified social welfare of their return to work then they will still receive a PUP payment for this week because technically they were entitled to the benefit for the previous Friday. The fact that they are working and in receipt of a wage this week will not disqualify them for the PUP payment.
This employee should receive a social welfare payment along with their wage payment in the same week.
In this case as far as Revenue is concerned the benefit is still active and the tax credits will remain at zero.
In the following week the closure of the PUP claim should make its way through the systems and the remaining tax credits should be restored. For some small number of cases this might fall into the 3rd week before tax credits are restored.
But I have an employee who is not on PUP and his credits have been reduced?
This will happen in cases where an employee is jointly assessed for PAYE and their spouse has been receiving PUP in 2021, but the reduction in tax credits very much depends on how they have been allocated between the couple.
What do I tell my employees?
For the vast majority of employees the zero tax credits will be offset by the fact that they will still receive a PUP payment from Social Welfare, so while it might appear to be unfair, its just a matter of timing and they should not be out of pocket.
Is this going to continue into the future?
Yes, in short it will.
There are currently 479,000 employees in receipt of PUP, and all of them who have an active employment will have had their tax credits greatly reduced (or eliminated) in the RPN update of 31st January.
As these employees come back to work over the coming months they are going to be faced with the same issue of having greatly reduced tax credits for the first few weeks when they return to work.
It is important to emphasise that in most cases the employees should continue to receive a PUP payment for the first week or two after they have recommenced their employment, and that their tax credits will be recalculated when the closure of their PUP claim has been completed.
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