How state and welfare benefits, allowances and savings are treated for tax purposes
and tax on savings interest. For disabled people and non-disabled people.
The law relating to Income Tax applies equally, to disabled people as to non-disabled people. There are, however, some points to note.
State benefits:Many state benefits are not treated as income for tax purposes, but additions for adult dependents are taxable.
The following benefits are not taxable.
- Attendance Allowance
- Back to Work Bonus (see EIM76223)
- Bereavement Payment - replaced Widow's Payment from 9 April 2001
- Child Benefit
- Child's Special Allowance
- Child Tax Credit
- Cold Weather Payments
- Council Tax Support, administered by local authorities
- Constant Attendance Allowance, see industrial disablement benefit below
- Disability Living Allowance
- Income related Employment and Support Allowance (see EIM76186)
- Exceptionally Severe Disablement Allowance, see industrial disablement benefit below
- Guardian's Allowance
- Housing Benefit, administered by local authorities
- Incapacity Benefit for first 28 weeks of entitlement, taxable thereafter (see EIM76180)
- Income Support, certain payments (see EIM76190)
- Industrial Injuries Benefit, a general term covering industrial injuries pension, reduced earnings allowance, retirement allowance, constant attendance allowance and exceptionally severe disablement allowance
- Invalidity Benefit, replaced by Incapacity benefit from April 1995 but still payable where invalidity commenced before April 1995.In-work credit In-work emergency discretion fund payment
- In-work credit
- In-work emergency discretion fund payment
- In-work emergency fund payment
- Maternity Allowance, see EIM76361
- Payments out of the Social Fund to people on a low income to help with maternity expenses, funeral costs, financial crises and as community care grants. The fund also makes interest-free loans.
- Pensioner's Christmas Bonus
- State Pension credit
- Reduced Earnings Allowance, see industrial disablement benefit above
- Retirement Allowance, see industrial disablement benefit above
- Return to work credit, including the self-employment credit
- Severe Disablement Allowance
- War Widow's pension see EIM76103
- Winter Fuel payment
- Working Tax Credit.
Employment and Support Allowance (ESA) can be taxable or non-taxable. If your ESA is contribution-based then it is taxable. If your ESA is income-related then it is not taxable.
Peopley migrate from Invalidity Benefit to ESA. If you move from taxable Invalidity Benefit to contribution-based ESA then the income remains taxable. If you move from non-taxable Invalidity Benefit or Income Support to contribution-based ESA then the income will become taxable. If you move to income-related ESA then the new benefit will not be taxable.
With regard to wounds and disability pensions for service with the forces see EIM74302 and for allowances payable to civilians in respect of war injuries see EIM74700.
Certain foreign social security payments are exempt from UK tax.
The following are treated as income for Income Tax purposes:
- Incapacity Benefit paid on new or revised claims (from April 1995) at the higher short-term rate and long-term rate.
- Invalid Care Allowance.
- Statutory Sick Pay and statutory Maternity Pay.
- Employer's contribution to sick pay paid out of an employer's sick pay scheme.
- Retirement Pension, including any invalidity addition.
- Widow's Pension, Widow's allowance and Widowed Mother's Allowance.
- Unemployment Benefit.
- Income Support paid to those who are unemployed, on strike, or involved in a trade dispute.
- Jobseeker's Allowance
- Industrial Death Benefit ( if paid as a pension)
Where benefit is taxable, additions for adult dependants (but not those for children) are also taxable.
Tax on savings interest
You don’t pay tax on tax-free savings accounts like:
- Individual Savings Accounts ISAs
- some National Savings and Investments products, eg savings certificates or Premium Bonds
For most other savings accounts, Income Tax at 20% is deducted by your bank or building society before it’s paid to you.
Depending on your income, you may:
- get your interest paid tax-free
- be able to claim tax back
- need to pay more tax
How much tax you pay
How much you pay depends on what you earn.
If your income’s less than £15,600 a year
You may be able to get your savings interest tax-free.
You can reclaim tax already paid on your interest if:
- you didn’t pay tax because your income was below your Personal Allowance before 6 April 2015
- you qualify for tax-free savings interest after 6 April 2015
How to claim
Fill in form R40 and send it to HM Revenue and Customs (HMRC). It normally takes 6 weeks to get the tax back.
You must reclaim your tax within 4 years of the end of the relevant tax year.
If your income’s less than £15,600 excluding savings interest
You may be able to reclaim some of the tax deducted from your interest even if your total income’s more than £15,600 a year.
Other basic rate taxpayers
You don’t need to do anything - your bank or building society will automatically deduct the correct tax from your savings interest.
Higher or additional rate taxpayers
You must pay extra tax on your savings and investment interest if you pay Income Tax at the higher or additional rate.
Tell HMRC what interest you’ve received so they can collect the extra tax.
You’ll pay it either:
- as part of your Self Assessment bill if you send in a Self Assessment tax return each year
- through your employer or pension provider - HMRC will tell them how much to deduct
3. Tax-free savings interest
Check if you’ll qualify for either:
- all your interest tax-free (if your taxable income is less than £15,600)
- a refund on some of the tax on your interest (if your taxable income is less than £15,600 when you don’t include savings interest)
Getting all your interest tax-free
It can be more than this if you get any of the following:
- Blind Person’s Allowance
- Marriage Allowance
- Married Couple’s Allowance
- age-related Personal Allowance
What you need to do
Contact your bank or building society to tell them you’re eligible. They’ll register you for tax-free savings.
If you’ve registered before for tax-free savings on each of your accounts, you don’t need to do it again.
Getting a refund on some of your interest
You could get a refund during the 2015 to 2016 tax year if all of the following apply:
- you already have details of your total taxable income including savings interest
- your total income is more than £15,600
- the amount that’s not from savings interest is less than £15,600
When you have your final figures for the 2015 to 2016 tax year, fill in form R40 and send it to HM Revenue and Customs (HMRC).
Contact the savings helpline if you need help and advice.
Home - to - work travel costs of severely disabled employees:
A person who is severely and permanently disabled and incapable of using public transport because of the disability may be provided with alternative means of transport or receive financial assistance with the cost of journeys between their home and place of employment. Normally such assistance would come from the Employment Service, or, in respect of disabled people employed in sheltered workshops, from local authorities.By concession, Income Tax is not charged under any of the provisions of Schedule E on the amount received or benefit provided.
Special pension awards:Pensions are normally taxable, but the amount by which a pension awarded on retirement through disability caused by injury on duty or a work-related illness, or by war wounds, exceeds the pension which would have been awarded if retirement had been on ordinary ill-health grounds it is not treated as income for Income Tax purposes. This concession does not apply to any pension or part of a pension which is paid out of the funds of tax-approved pension arrangements.
Keeping your Tax Office informed if your benefits change
If you start or stop getting benefits, it may affect your tax bill. The sooner you get in touch with your Tax Office, the sooner they can adjust your tax code to make sure you always pay what's due - no more and no less.
If you already pay tax
If you stop getting taxable benefits let your Tax Office know, so that you don't pay too much tax.If you start getting new benefits, including the State Pension, tell your Tax Office - that way you'll avoid a build up of tax owing if the benefits are taxable.
If you're not sure whether you should be paying tax
If you're working out whether or not you should be paying tax, make sure you include any taxable benefits (including your State Pension) in your overall income.You'll find contact details for your Tax Office on paperwork they've sent you, or you can search for them online.
A charity that helps people on low incomes with their tax affairs.they help people on low incomes to understand the bits of the tax system that apply to them (safely ignoring the confusing 98% that don’t), pay only the right amount of tax and help them resolve crises when things go wrong.TaxAid
- is unique as a charity providing free, independent, advice across the range of tax issues that impact on people on low incomeshelps the most disadvantaged 20% of unrepresented taxpayers on low incomes who cannot afford professional adviceuses its unique experience in advising to influence government and HM Revenue and Customs in cases where the tax system is unfair, inefficient or reduces incentives to work
- trains high street advice agencies to recognise the problem, deal with the first step and appropriately refer.
A national helpline is available (see below), and provides face-to-face services in London, Birmingham, Manchester, Newcastle and gives advice via email. Appointments are also available in Bristol, Plymouth, Sheffield and Shropshire (via TellyTalk).
The website is designed to make tax understandable to any taxpayer:: http://taxaid.org.uk