Could Week One Basis help employees avoid Covid-19 tax trap?
At the time of writing, more than 255,000 employees have received at least one payment under the Covid-19 Temporary Wage Subsidy Scheme. Like any income, this payment is taxable, however Income Tax and the Universal Social Charge are not deducted in real time. Instead, the subsidy payment will be liable to Income Tax and USC on review at the end of the year. Consequently, some employees are worried they may face a year-end tax bill, particularly if they are receiving ‘top up’ payments from their employer.
Income Tax Week One Basis
Where appropriate, the Week One Basis for Income Tax could help alleviate employees’ concerns. Also known as the ‘non-cumulative basis’, the Week One Basis calculates an employee’s Income Tax and USC week-to-week. The employer treats each payroll submission as a standalone event and the employee receives the tax credits for that particular period only.
This contrasts with the usual system where PAYE and USC are calculated a cumulative basis from 1 January each year to the date on which the payment is being made and any unused tax credits can be carried forward to the next period.
Advantages and disadvantages of the Week One Basis
For employees in receipt of the Temporary Wage Subsidy payment, an advantage of the Week One Basis is that it minimises the risk of receiving an Income Tax bill at the end of the year.
Typical reasons why an employee might be taxed on the Week One Basis, include:
• Where a large reduction in tax credits would result in hardship
• Where there is a lack of information available from the employees previous employment
• In Week 53 of the year
• When making payments to a ceased employee
• When all of the employee’s tax credits and band allowances have been transferred to their spouse
• Where an employee does not want their employer to have information in relation to their prior employments.
The main disadvantage of the Week One Basis is that it can lead to overpayment of tax. Furthermore, the employer cannot issue any refund of tax that may be due as this can only be done on the cumulative basis. However, in the current circumstances where some employees fear a year-end tax bill due to their employer’s participation in the Temporary Work Subsidy Scheme, the Week One Basis may be an option to consider.
For further information and/or advice, contact ifac’s payroll team at payroll@ifac.ie