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Income Tax (Earnings and Pensions) Act 2003

Overview

2583.This Part identifies the income that is taxed as social security income. It derives mainly from section 617 of ICTA. It also derives from other provisions of the Income Tax Acts that deal with the taxation of social security income.

2584.Section 617 of ICTA contains the main rules and charges United Kingdom social security benefits to tax under Schedule E. It sets out in narrative form the various social security benefits that are charged to tax. It also identifies the benefits that are not charged to tax. And it provides that some of those benefits are not to be treated as income for any income tax purpose.

2585.Subsections (3) and (4) of section 617 of ICTA deal with whether social security contributions may be deducted for tax purposes. The sections in this Part deal only with the charging of benefits. So the rules about deductions are not rewritten here.

2586.The aim of the social security income Part is to set out all the rules charging or exempting benefits payable under the social security Acts. The approach is to list the benefits in two tables. One table lists the taxable benefits and the other lists the non-taxable benefits.

2587.The Part also sets out the charging and exemption rules that apply to foreign benefits.

Chapter 1: Introduction
Overview

2588.This Chapter sets out the structure of the social security income Part.

Section 655: Structure of Part 10

2589.This is the only section in the Chapter. It is new.

2590.Subsection (1) lists the other Chapters in the Part. It identifies the different Chapters that deal with United Kingdom and foreign social security benefits. In each case, different Chapters deal with the benefits that are charged to tax and those that are exempt.

2591.Subsection (2) is a signpost to three rules that apply to government payments but which are not dealt with in this Part. The rules are not rewritten in this Part because they may apply more widely than to social security income alone. For instance, a Treasury order under section 151 of FA 1996 may require that a benefit is taxed as a business receipt.

Chapter 2: Tax on social security income
Overview

2592.This Chapter imposes the charge on “net taxable social security income” and explains how to calculate “net taxable social security income”. There are four steps in the process:

  • Step one - identify the income as social security income;

  • Step two - exclude any exempt income;

  • Step three - calculate the amount of “taxable social security income”; and

  • Step four - calculate “net taxable social security income” by allowing any payroll giving deductions from “taxable social security income”.

2593.These steps are carried out separately for each United Kingdom and foreign social security benefit.

2594.The Chapter includes a signpost to the provisions that identify the person liable to pay any tax charged on United Kingdom and foreign social security benefits.

Section 656: Nature of charge to tax on social security income

2595.This section explains that the charge on social security income does not extend to income that is exempt from tax. It is new.

2596.Exempt income is included in the definition of social security income but is not taxed. The definition of “exempt income” applies for the purposes of the social security income Part. In particular, the expression is used in section 681(1) (taxable and other foreign benefits: exemptions).

Section 657: Meaning of “social security income”, “taxable benefits” etc.

2597.This section introduces the terms which are used to identify the benefits that are taxable and to arrive at the amount of income that is charged to tax. It is new.

2598.Subsection (2) makes it clear that the expression “social security income” (used in section 656) includes both taxable benefits and those that are exempt.

2599.Subsection (4) ensures that the four statutory payments listed in section 660(2) are not included in social security income if they are charged to tax as employment income.

Section 658: Amount charged to tax

2600.This section imposes the charge to tax. It is new.

2601.The section explains how relief for payroll giving is allowed against social security income. The rules for the relief are in Part 12. Those rules depend on a definition of “taxable social security income” from which the payroll giving deduction (“PGD”) is subtracted to arrive at the “net taxable social security income”. That lower amount is the amount on which tax is charged.

2602.Each taxable benefit is treated separately in the calculation of net taxable social security income.

Section 659: Person liable for tax

2603.This section is a signpost to the sections later in the Part where the person liable for the tax is identified for United Kingdom and foreign benefits. It is new.

Chapter 3: Taxable UK social security benefits
Overview

2604.This Chapter sets out the rules for taxing United Kingdom social security benefits.

2605.The charge on United Kingdom social security benefits in ICTA is under Schedule E. The charge is under paragraph 5 of Schedule E (section 19(1) of ICTA):

…any other provision of the Tax Acts directing tax to be charged under this Schedule …

2606.Section 150(a) of ICTA charges allowances under Job Release schemes. The last Order under the Job Release Act 1977 extended the effect of the Act to 29 September 1988. So this Act does not rewrite paragraph (a) of the section (or section 191 of ICTA). The other paragraphs, which charge statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay, are rewritten in this Act - see paragraph 2608.

2607.The Chapter sets out the income chargeable. It also identifies the basis of assessment and the person chargeable.

Section 660: Taxable benefits: UK benefits – Table A

2608.This section sets out the United Kingdom benefits that are taxable. It derives from section 617(1) of ICTA. That subsection deals with most United Kingdom benefits (some of which are taxed in Part 9 as pensions). The table in this section also lists other benefits that are not within section 617:

  • statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay, from section 150 of ICTA;

  • income support, from section 151 of ICTA;

  • jobseeker’s allowance, from section 151A of ICTA; and

  • incapacity benefit, from section 139 of FA 1994.

2609.Subsection (1) is the first of the tables (“Table A”). This table lists the taxable UK benefits. The second table (“Table B”) is in section 677 – see paragraph 2682.

2610.The table identifies each benefit by the section of the social security Act under which it is paid. The table also identifies the corresponding Northern Ireland provision if it has been enacted. The suspension of the Northern Ireland Assembly has prevented the enactment of some proposed Northern Ireland provisions. Those provisions are described rather than identified in the table.

2611.The table arranges the benefits in alphabetical order. This means that a particular benefit should be easy to find. And it should be easy to maintain the clarity of the table because it will be easy to insert any new benefit into the table in the right place.

2612.Incapacity benefit is included in the table of taxable benefits. See Change 143 in Annex 1.

2613.Subsection (2) is a special rule for statutory adoption pay, statutory maternity pay, statutory paternity pay and statutory sick pay. It derives from the opening words “if they would not otherwise be (chargeable)” in section 150 of ICTA.

2614.In most cases these payments are earnings from an employment and charged to tax under the employment income Parts of this Act. This subsection ensures that a charge under the employment income Parts takes precedence over a charge under the social security income Part.

2615.In other cases the payments are made by the government. Then there is no charge to tax on them as earnings and they are charged as social security income.

Section 661: Taxable social security income

2616.This section sets out the basis of assessment for some United Kingdom social security benefits. It derives from section 41(2) of FA 1989, which applies only to the benefits (and pensions) mentioned in section 41(1) of FA 1989.

2617.Incapacity benefit is explicitly brought within the rule in section 41 of FA 1989 by section 139(3) of FA 1994.

2618.Five benefits in Table A are not covered by the rule in section 41 of FA 1989. They are statutory adoption pay, statutory maternity pay, statutory paternity pay statutory sick pay (all charged to tax by section 150 of ICTA) and jobseeker’s allowance (charged to tax by section 151A of ICTA). There is no statutory basis of assessment for these benefits in ICTA.

2619.So the section applies only to the first four benefits listed in Table A.

Section 662: Person liable for tax

2620.This section identifies the person chargeable. It is new.

2621.The rule in this section applies only to United Kingdom social security income. But an identical rule applies to foreign social security income – see section 680.

2622.The social security income Part includes income that ICTA taxes under Schedule E and income that ICTA taxes under Schedule D. For income taxed under Schedule D section 59(1) of ICTA identifies the person chargeable as the person “receiving or entitled” to the income.

2623.There is no equivalent of section 59(1) of ICTA for social security benefits that ICTA taxes under Schedule E. It would be inconsistent to identify a person chargeable for some but not all social security income. The social security income Part avoids this inconsistency. It makes the person liable for tax on social security income the person receiving or entitled to the income in all cases where ICTA does not specify the person chargeable. See Change 135 in Annex 1.

Chapter 4 Taxable UK social security benefits: exemptions
Overview

2624.This Chapter sets out the partial exemptions that apply to the taxable benefits listed in Table A. It derives from sections 151, 151A and 617 of ICTA and section 139 of FA 1994.

2625.One exemption applies generally. That is the exemption for any part of a benefit that is in respect of a child. The other exemptions relate to part of the following benefits:

  • incapacity benefit;

  • income support; and

  • jobseeker’s allowance.

2626.This Chapter deals with the benefits that are sometimes taxable. Chapter 5 deals with the benefits that are never taxable.

2627.Section 617(2) of ICTA provides that payments within the subsection “shall not be treated as income for any purpose of the Income Tax Acts”. In order to make the exemptions simple and consistent the phrase “no liability to income tax arises” is used throughout this Act to express exemption from tax. See Note 28 in Annex 2.

Section 663: Long-term incapacity benefit: previous entitlement to invalidity benefit

2628.Long-term incapacity benefit is usually taxable. But this section exempts long-term incapacity benefit from tax in some circumstances. The section derives from section 139(2) and (5) of FA 1994.

2629.Subsection (1) exempts long-term incapacity benefit from tax if it relates to a period of incapacity for work that started before 13 April 1995. On 13 April 1995 incapacity benefit replaced sickness benefit and invalidity benefit.

2630.This provision has a limited life because no new claimants will be entitled to the exemption. But a significant number of claimants remain entitled to the exemption.

2631.Subsection (2) contains the definition of invalidity benefit. This was the expression used to describe invalidity pension and invalidity allowance. Neither sickness benefit nor invalidity benefit was taxable.

Section 664: Short-term incapacity benefit not payable at the higher rate

2632.This section limits the charge to tax on short-term incapacity benefit. It relies on definitions in the social security legislation. It derives from section 139(1)(a) of FA 1994.

2633.The charge on incapacity benefit in section 139 of FA 1994 excludes “benefit payable for an initial period of incapacity”. That period is defined as a period for which short-term benefit is payable other than at the “higher rate”.

2634.Subsection (1) restricts the charge to tax on short-term incapacity benefit so that it is taxable only if it is payable at the “higher rate”.

2635.Subsection (2) cross-refers to the definition of “higher rate” in the social security legislation. The phrase is construed in accordance with section 30B(5) of the Social Security Contributions and Benefits Act 1992. That section refers to the rates of benefit set out in Schedule 4 to the Act. The benefit is payable at the “higher rate” after the first 196 days of a period of incapacity for work.

2636.As noted in paragraph 2608, incapacity benefit is charged to tax by section 139 of FA 1994. So it is logical for the benefit to be excluded from the charge in section 617 of ICTA. A free-standing charge was set up by section 139 of FA 1994 in case section 617(1) was not effective in taxing a new benefit – an explicit charge was thought to be safer.

2637.When incapacity benefit replaced sickness benefit and invalidity benefit in 1995, the references to the older benefits were not removed from section 617(1) of ICTA (some publishers have updated the text to help the reader). Instead, section 13(2) of the Social Security (Incapacity for Work) Act 1994 treats the references to sickness benefit and invalidity benefit in section 617(1)(a) as references to incapacity benefit. So incapacity benefit appears to be excluded from the charge in section 617 by subsection (1)(a).

2638.A consequence of exclusion from the section 617(1) charge would be that the benefit is not regarded as income for income tax purposes because of section 617(2)(c). This was overlooked when section 139 of FA 1994 set up the free-standing charge. So the benefit is apparently disregarded by section 617 of ICTA but clearly taxed by section 139 of FA 1994.

2639.This Act clarifies the law, to bring it into line with the clear, undisputed, policy objective (to tax incapacity benefit) and generally accepted practice. See Change 143 in Annex 1.

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