Disability Benefit

Introduction

The purpose of this Article is to set out for practitioners and employers:

• The changes in the taxation rules for Disability Benefit for the tax year 1997/98
• How Disability Benefit paid to employees while out sick in 1997/98 is to be brought into taxation by employers through payroll, having regard to the changes.

References in this article to Disability Benefit should be taken to include references to short-term Occupational Injury Benefit.

Disability Benefit - Taxation Rules since 6 April 1993

Disability Benefit became a taxable source of income with effect from 6 April 1993.

With effect from 6 April 1995, the taxation rules applying to Disability Benefit were changed to exempt Child Dependant additions (i.e. additional payments made to claimants in respect of qualifying children).

For the tax year 1997/98 (i.e. from 6 April 1997), the taxation rules applying to Disability Benefit are being further changed to exempt from tax Disability Benefit payable for the first 3 weeks, i.e. the first 18 days, for which benefit is payable in the tax year.

Notification from the Department of Social Welfare

The Department of Social Welfare will notify all employers of the amount of the weekly Disability Benefit (excluding Child Dependant additions, if relevant) which an employee is entitled to receive while out sick and the date the payment commenced. A week’s Disability Benefit consists of payment for 6 days (excluding Sundays). Therefore, the daily rate is one-sixth of the weekly rate.

Calculation of Exemption Period for 1997/98

Disability Benefit payable for the first 18 days in the tax year 1997/98 is exempt from tax.

Because the exemption applies to an aggregate period for which Disability Benefit is payable, Sundays and the 3 “waiting days” for which Disability Benefit is not payable are not included in calculating the 18 days for which exemption is due.

Where an employee uses the full exemption in one single sick period the exemption will, effectively, expire 21 days (excluding Sundays) from the first day of absence i.e. the 3 “waiting days” for which Disability Benefit is not payable plus the 18 days for which Disability Benefit is payable.

However, it should be noted that, where an employee uses the exemption over more than one period of absence where claims for Disability Benefit are separated by more than 3 days, the 3 “waiting days” for which Disability Benefit is not payable apply to each separate claim period. In such circumstances the aggregate 18 day exemption period may be increased by 3 days for each separate period of absence.

For example, in the case of three separate periods of absence, the employee would need to be absent for 27 days (excluding Sundays) i.e. 18 + 3 + 3 + 3 before any Disability Benefit becomes taxable.

When the period of exemption expires, Disability Benefit subsequently payable is taxable as before i.e. Disability Benefit payable less Child Dependant additions, if relevant.

Action by Employers - General

Because significant numbers of employees will be exempt from taxation of Disability Benefit as they will receive payment of Disability Benefit for less than 18 days in 1997/98, taxing Disability Benefit through payroll will not be relevant for many employers or employees.

Where it is relevant, the taxation of Disability Benefit through payroll will depend on the particular circumstances or arrangements between employers and employees while employees are out sick. These arrangements are set out in Sections A, B and C below.

As well as knowing the amounts of their employees’ Disability Benefit payments, some employers will also be aware of the period to which the payments relate. Consequently, they will readily have the appropriate information to implement the new taxation rules, through payroll, for Disability Benefit for 1997/98. They should, therefore, in advance of receipt of the notification from the Department of Social Welfare, take immediate action in accordance with the appropriate section below, after the relevant exemption period expires to effectively tax Disability Benefit through payroll.

Where the employer is not aware of the amount of an employee’s Disability Benefit but is otherwise in a position to take the necessary action, the basic personal rate of payment ₤64.50 (₤67.50 from 9 June 1997) should be assumed until advised otherwise by the Department of Social Welfare or by the Inspector of Taxes.

Section A

Employers who pay wages, salary etc., to employees while out sick and recover the Social Welfare Disability Benefit from the employees

The arrangement between these employers and employees will be such that the employer will be aware of

• the date the employee went out sick
• the date from which Disability Benefit became payable
• the make-up of the Disability Benefit (e.g. Personal Rate, Adult Dependant and Child Dependant additions, if relevant etc.)

Appropriate action should be taken by such employers without reference to the notification from the Department of Social Welfare as they will already have all the relevant information to apply the new exemption and taxation rules for Disability Benefit.

The amount of Disability Benefit the employee is entitled to receive for 18 days in aggregate in the tax year 1997/98 is exempt and should be excluded from payroll for tax purposes. This means that only the difference between the wages, salary etc. paid and the Disability Benefit recovered is subject to tax and PRSI for the duration of the exemption period.

If an employee is still out sick after the exemption period expires and continues to receive and pay over Disability Benefit while out sick, tax should be deducted from the gross wages, salary etc., less the Child Dependant additions of Disability Benefit, if relevant. However, PRSI should only be charged on the difference between the gross wages, salary etc., and the amount of Disability Benefit recovered. While Disability Benefit less Child Dependant additions is taxable after the exemption period expires, it is not chargeable to PRSI.

Section B

Employers who pay wages, salary etc., to employees while out sick (top-up etc.) and the employees retain the Disability Benefit

Where an employer pays employee’s partial wages while out sick and the employee retains the Disability Benefit, many employers, to maintain the cumulative system of PAYE, already include the Disability Benefit (less Child Dependant additions, if relevant) with earnings. Under such a procedure the combined amount would be charged to tax but only the actual earnings paid by the employer would be charged to PRSI (Disability Benefit is not chargeable to PRSI).

For the purpose of the new exemption such employers will be aware of the employees’ circumstances as set out in Section A. Until the Disability Benefit exemption period expires, tax and PRSI should be charged only on the wages actually paid. When the period of exemption expires the Disability Benefit should be taxed through payroll as outlined above, that is, the Disability Benefit included with earnings should be subject to tax but not PRSI.

However, some employers may not be able to include taxable Disability Benefit with earnings. To maintain the cumulative system of PAYE, some employers opted in earlier years to reduce employees’ tax-free allowances by taxable Disability Benefit on a cumulative basis. Where it was not possible to maintain the cumulative system, other employers opted to reduce employees’ tax-free allowances by taxable Disability Benefit and allow the reduced tax-free allowances on a Week 1/Month 1 non-cumulative basis. Both these options continue to be available after the exemption period expires.

Section C

Employers who do not pay wages, salary etc., to employees while out sick and the employee retains the Disability Benefit (including employers who use official Tax Deduction Cards)

During the Disability Benefit tax exemption period, no adjustments for tax purposes are required and the cumulative system of PAYE continues unchanged where the employee returns to work before the end of the exemption period.

The exemption period should cover the majority of employees. However, if an employee is out of work due to illness after the exemption period expires, the following action should be taken.

Some employers who do not pay wages, salary etc., to employees while out sick may wish to maintain the cumulative system of PAYE. Taxable Disability Benefit payable after the period of exemption expires may be included as earnings on the tax deduction card and the cumulative system of PAYE continued as normal.

However, it may not be possible for other such employers to maintain the cumulative system. In those circumstances, when the employee returns to work, the tax-free allowances should be allowed against the employee’s earnings on a Week 1/Month 1 (non-cumulative) basis -

• until the following 5 April or
• until confirmation is received from the tax office that the cumulative basis should be reinstated.

The provisions under which refunds may be made during periods of absence from work due to illness after the exemption period expires do not apply unless the tax office confirms that they should apply. It is essential that tax-free allowances are not accumulated and tax refunds inadvertently made.

If a cumulative tax-free allowance certificate or tax deduction card is received for an employee who is still out sick after the exemption period expires this documentation should only be used after checking with the tax office that it is in order to do so. The tax office may not be aware that the employee was out sick from work and in receipt of Disability Benefit.

Tax Documents etc.

Where taxable Disability Benefit is included with earnings and taxed through payroll as such, emoluments shown on tax documents e.g. P45, P60, P35 etc., should be inclusive of the taxable benefit.

Practitioners and employers are reminded that they should make their local PAYE tax office aware of the method of taxing Disability Benefit through payroll adopted by them.

Assistance

If any practitioner or employer requires assistance on the taxation of Disability Benefit through payroll he/she should contact their local tax office or the Central Telephone Information Office at (01) 878 0000.