This article explains the new income Levy (the Levy) announced by the Minister for Finance (the Minister) during his Budget 2009 speech (on 14 October 2008), and the updates to it (announced during the Supplemental Budget on 7 April 2009). It also considers how the Levy operates and what employers need to be aware of in applying it to employees’ salaries. The Levy came into effect on 1 January 2009 and, according to the Minister, is intended to be a temporary measure. During the recent Supplemental Budget speech, the Minister lamented the inability of the Irish government to make ‘significant’ income tax changes half way through the tax year. Instead, and to raise extra tax revenues, the Irish government opted to hike up the Levy. With a backdrop of continued worsening economic conditions, the Irish government saw fit to double the rates and lower the entry-level thresholds. One of the unsatisfactory aspects of the Levy is that it is payable on gross income with no deductions available for capital allowances, losses or pension contributions.
New Measures
The new Levy rates are 2%, 4% and 6% and the new entry-level thresholds are €15,028, €75,036 and €174,980 per annum. These new measures take effect from 1 May 2009. The measures can be contrasted with the previous rates of 1%, 2% and 3% and entry-level thresholds of €18,304, €100,101 and €250,120 per annum.
When the Levy was introduced it was widely believed that the first €15,028 per annum earnings were exempt. However, the Revenue has confirmed that once an individual’s income is greater than €15,028, the Levy is payable on the full income. Similarly, if a person who is over 65 years old has an annual income that exceeds €20,000, they will be liable to pay the Levy on their full income. These new measures, combined with the doubling of health levy rates (to 4% and 5%), significantly increase the tax burden for employees.
In defence of these increases the Irish government believes it has ensured that the new measures are ‘fair, equitable and highly progressive’, and still mean that Ireland continues to have one of the lowest tax wedges within the Organisation for Economic Co-operation and Development (OECD).
Backdated?
Despite the Minister indicating that the new measures would have effect from 1 May 2009, the changes appear to apply retrospectively in that they have been backdated to 1 January 2009 by the imposition of composite Levy tax rates. The Financial Resolution (issued on 7 April 2009) states that:
‘For the year of assessment 2009, an individual shall be charged to income levy on the aggregate of his or her relevant income for the year of assessment and relevant emoluments in the year of assessment at the rates specified [in Table 1 below] notwithstanding that the relevant emoluments are in whole or in part for some year of assessment other than that year of assessment during which the payment is made.’
Generally, relevant emoluments means the income of an employee subject to PAYE, whereas relevant income means the income of a self-employed person (other than PAYE income).
Composite Levy rates
The Department of Finance is on record as saying that directors and self-employed individuals will not escape the hike in the Levy from 1 May 2009 by simply paying themselves lump sums in the first four months of 2009. Such individuals will pay the composite Levy rates, a combination of the lower and higher rates, on their full income for 2009, to ensure they pay their ‘fair share’ of tax.
New Levy rates
For 2010, and subsequent tax years, an individual will pay the Levy on the aggregate of their relevant income for the year of assessment and relevant emoluments in the year of assessment at the rates in Table 2 below.
Employers’ Obligations
Period beginning on 1 January 2009 and ending on 30 April 2009
For emoluments (ie salary, wages, benefits in kind (BIK)) paid to an employee in the period beginning on 1 January 2009 and ending on 30 April 2009, the Levy must be deducted by the employer at the following rates:
- 1% where the relevant emoluments do not exceed €1,925 per week;
- 2% on the excess where the relevant emoluments exceed €1,925 per week but do not exceed €4,810 per week; and/or
- 3% on the excess where the relevant emoluments exceed €4,810 per week (and notwithstanding that the relevant emoluments are in whole or in part for some year of assessment other than that during which the payment is made).
Period from 1 May 2009
On or after 1 May 2009 for emoluments paid to an employee the Levy must be deducted by the employer at the following rates:
- 2% where the relevant emoluments do not exceed €1,443 per week;
- 4% on the excess where the relevant emoluments exceed €1,443 per week, but do not exceed €3,365 per week; and/or
- 6% on the excess where the relevant emoluments exceed €3,365 per week (and notwithstanding that the relevant emoluments are in whole or in part for some year of assessment other than that during which the payment is made).
Effect of Changes on Employers
Employers are responsible for deducting the Levy from their employees’ salaries. But do they deduct the Levy at the new rates or the composite rates? Do they need to re-visit salary payments prior to 1 May 2009 and apply different rates? Thankfully, the Financial Resolution specifies that employers should operate the Levy at the old rates (1%, 2% and 3%) up to 30 April 2009 and at the new rates (2%, 4% and 6%) on or after 1 May 2009.
There are no provisions in the Financial Resolution requiring employers to re-compute the Levy on salary payments made in the period from 1 January 2009 to 30 April 2009. Revenue is on record as stating that where an employer or pension provider finds that the Levy has been under-deducted at the end of 2009 the employer is not to deduct additional levies as Revenue will deal with any underpayments arising. In such circumstances an employer or pension provider is not responsible for paying any underpayment of Levy on an employee’s behalf. The underpayment is between Revenue and the individual.
Social Welfare Payments and Salary Sacrifices
As mentioned above, the general rule is that the Levy is payable on gross income before deduction of any capital allowances, losses or pension contributions. However, if social welfare payments (for example, illness benefit) or salary sacrifices approved by Revenue have been made by the employee, these amounts may be deducted by the employer when calculating the Levy due.
Employee with Non-PAYE Income
The contrast in treatment of an employee (subject to PAYE) and an employee with non-PAYE income is explained below.
An employee with income subject to PAYE (who was paid a bonus in March 2009) and non-PAYE income (ie rent, dividends, etc) will have to file an income tax return (because of the receipt of non-PAYE income) and observe the usual preliminary income tax payment obligations. Once the income tax return has been filed, a notice of assessment for income tax will issue from Revenue to the individual. It is likely that the individual will be assessed by Revenue at this time on the Levy for 2009 and may have to pay additional levies on the bonus paid in March 2009 together with the non-PAYE income at the new composite rates.
However, an employee that only has income subject to PAYE (and who was paid a bonus in March 2009) does not have to file an income tax return and, according to Revenue guidance, the employer does not have an obligation to reassess any underpayment of the Levy (paid in March 2009) at the new composite rates. Therefore, Revenue’s ability to assess the individual for any additional levies on the bonus paid in March 2009 is limited given that no income tax return needs to be filed by the individual.
Perhaps Revenue will become aware of bonus payments made to employees by auditing the P35/P30 filings of employers for 2009. In any case, given the limited resources at Revenue’s disposal, problems with the collection of the Levy on income received by employees in the period prior to 1 May 2009 are likely to arise.
The Finance Bill 2009 (the Bill) that was published on 7 May 2009, does, however, give Revenue the power to make regulations for the purposes of assessing, collecting and recovering the Levy.
Termination Payments
Statutory redundancy payments are exempt from the Levy.
Ex-gratia payments made by employers to former employees on termination of their employment that are not greater than certain statutory limits (ie basic exemption, increase in basic exemption and Standard Capital Superannuation Benefit (SCSB)) are also exempt from the Levy.
However, amounts in excess of these statutory limits will be subject to the Levy. Concerning termination payments made prior to May 2009, the Bill contained provisions confirming that any taxable portion of redundancy payments made in the first four months of 2009 will only be subject to the income Levy at the rates in force at the time (as opposed to the higher composite rates).
Opposition to Backdating
Strong objections were raised to the decision to backdate the application of the new Levy rates, particularly given the impact it may have on redundancy packages. Thousands of people who were made redundant prior to 1 May 2009 may have the new Levy assessed on the taxable portion of their termination payments, notwithstanding that the new measures are stated to be effective from 1 May 2009.
It is questionable whether the Irish government intended the new Levy rates to apply to people receiving redundancy sums. The opposition parties have requested that people who have been made redundant prior to 1 May 2009 will not be faced with a hefty tax bill as a result of backdating the increase in the Levy.
The retrospective nature of this new tax has also been criticised as being unjust and legally dubious. While Irish retrospective tax legislation is rare, it may be contrary to the Irish Constitution and/or the European Convention on Human Rights.
Conclusion
Despite piece-meal restatements by Revenue and the Department of Finance on how the new measures will operate, the position for individuals remains somewhat ambiguous and the application of the Levy remains widely misunderstood.
Employers can take a measure of comfort from the fact that it is clear from Revenue pronouncements that they must ignore the composite Levy rates and apply the old Levy rates on emoluments paid between 1 January 2009 and 30 April 2009, and the new Levy rates on emoluments paid after 1 May 2009.
By Brian Duffy, tax partner, William Fry Tax Advisors.
E-mail: brian.duffy@williamfry.ie.
