Pensioners who get a back payment of the State pension early next year shouldn’t get hit for tax if the back payment pushes the total amount of income they received in 2019 above the income tax exemption limits for those aged 65 and over. This is because of a change brought in under the Finance Act 2017 which means that since January 2018, certain income (including social welfare ) is taxable in the year that it is earned, rather than in the year it is received. This measure was brought in “to ensure that payment of arrears of social welfare payments does not result in unintended tax consequences,” said a spokesman for the Revenue Commissioners.
“Where arrears of such payments arise, the accumulation of arrears could, if moved to a receipts basis [where income is taxable in the year the income is paid], result in payments which would normally be taxed at the lower rate of tax coming into charge at the marginal [higher] rate. That scenario has been avoided by leaving social welfare payments on an earnings basis [where income is taxable in the year it was earned].”
Under the income tax exemption limits, a single person aged 65 or more is exempt from income tax where their annual income is no more than €18,000; or €36,000 in the case of a couple. The State pension is not liable to the Universal Social Charge (USC).
There is no need to inform the Revenue Commissioners of any back payment of the State pension received in early 2019. The Department of Social Protection will notify Revenue of the back payments paid to pensioners — as part of its normal payment information exchange process. “Payments referring to 2018 will be allocated to the 2018 tax year on the recipients’ Revenue records,” said a spokeswoman for Revenue. “This, in turn, will ensure that the earnings basis is applied to these payments.” Those entitled to a back payment are expected to get their back money in the first three months of 2019. “Payments will take a number of months to process due to the numbers of customers involved,” said a spokeswoman for the Department of Social Protection. Back payments are due because the Government has decided that the date at which the new TCA will come into effect for these 67,000 pensioners is March 30, 2018. As it will be early 2019 before these people get any higher State pension due to them under the TCA (assuming they move to the TCA), the higher payments will be backdated to the end of March 2018 — or later where a person reached their 66th birthday after that date. The back payments won’t go back as far as September 2012 — which is when many of the 67,000 pensioners saw their State pension cut. Where back payments are due, they “will vary significantly, depending upon the individual’s social insurance record”, according to the Department. By this paper’s calculations, were a pensioner due a €40 weekly increase to their State pension, their back payment could be worth about €1,500 — based on the pensioner being entitled to €40 extra a week between March 30, 2018 and the end of 2018.