Some 2,000 workers who rely on overtime to bump up their earnings could end up losing money due to increases in the cost-of-living adjustment (COLA), according to a leading HR and payroll provider.

Jonathan Mifsud, co-founder and CTO of Buddy Ltd, said the move will affect workers who currently benefit from a lower tax rate on overtime earnings.

Since last year, workers in non-managerial positions who are paid less than €19,500 are taxed on a lower rate of 15% on their first €10,000 of overtime.

However, with COLA set to rise by nearly 30% to €12.81, this could push some workers’ annual earnings above the €19,500 threshold.

Should this happen, they will be liable to pay the standard tax rate of 25% on their overtime earnings.

The move will affect an estimated 2,000 workers earning between €18,800 and €19,500, Mifsud has calculated.

“If the goal was to put more money in people’s pockets, it didn’t do that for this group of people... The budget didn’t address workers who might lose out because of this,” he said.

Mifsud stressed that had the threshold been raised in line with the adjustment to the minimum wage, the government “wouldn’t have lost money, it would have kept the same”.

In real terms, this is a wage cut of €1,000

This year, a worker earning a basic salary of €19,000 and working 730 hours of overtime would pay over €2,100 tax on their main earnings and €1,500 on their overtime – a total of just over €3,600.

From next year, however, the same worker will pay €4,900 in tax contributions due to no longer qualifying for the lower rate of overtime tax, according to a tax calculator provided by Buddy Ltd.  

Mifsud noted that while the employee would only notice an overall reduction of €300 in their take-home pay due to the increases to COLA and the minimum wage, this didn’t reflect the complete situation.

“Had the threshold been raised in line with the other adjustments, those workers would have seen their take-home pay increase more. In real terms, this is a wage cut of €1,000,” he said.

Tax relief on overtime was first announced by former finance minister Edward Scicluna in his budget speech in 2019. The measure was suggested by Labour while in opposition in 2008.

When first introduced, the lower rate of tax was applicable up to the first 100 hours of overtime, before being changed two years later to reflect a maximum monetary value of overtime worked.

Questions have been sent to the Finance Ministry.

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