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Wednesday, 3 October 2023

How benefits are taxed

Some social security benefits count as taxable income and others don't. It's important to understand which do and don't count for tax purposes - to make sure you pay the right amount of tax.

Taxable benefits

If you're a Self Assessment taxpayer, you'll need to make sure that you include any taxable benefits you're getting in your overall income. The most common taxable benefits are:

  • Bereavement Allowance
  • some Incapacity Benefit payments - not taxable for the first 28 weeks
  • some Income Support payments - not taxable if you haven't signed on as unemployed and you're looking for work
  • Employment and Support Allowance - contribution-based (if you have paid enough National Insurance contributions)
  • pensions payable under the Industrial Death Benefit scheme
  • Carer's Allowance - child dependency additions are not taxable
  • Jobseeker's Allowance
  • retirement pension - the State Pension is taxable but, unlike company pensions, it's paid to you without tax being taken off so you need to tell your Tax Office you're getting it
  • Statutory Sick Pay
  • Statutory Maternity Pay
  • Widowed Parent's Allowance

Benefits that aren't taxed

There are some benefits that you don't have to pay tax on. The most common benefits that aren't taxed are:

  • Attendance Allowance
  • Back to Work Bonus
  • Bereavement Payment
  • Child Benefit
  • Child's Special Allowance
  • Child Tax Credits
  • Cold Weather Payments
  • Council Tax Benefit
  • Constant Attendance Allowance
  • Disability Living Allowance
  • Exceptionally Severe Disablement Allowance
  • Guardian's Allowance
  • Housing Benefit
  • Incapacity Benefit for the first 28 weeks of entitlement
  • Income Support - taxable if you're on strike during a trade dispute
  • Employment and Support Allowance - income-related
  • Industrial Injuries Benefit
  • Invalidity Benefit - replaced by Incapacity Benefit from April 1995 but still payable if the invalidity started before April 1995
  • Maternity Allowance
  • Pensioner's Christmas Bonus
  • Reduced Earnings Allowance
  • Retirement Allowance
  • Severe Disablement Allowance
  • Social Fund payments (and interest-free loans) to people on a low income to help with maternity expenses, funeral costs, financial hardship and as community care grants
  • War Widow's Pension - if you're entitled to a War Widow's Pension and it's not paid to you, or you're paid less because you get another benefit, you may not have to pay tax on some of the other benefit
  • Winter Fuel Payment
  • Working Tax Credit

Please note

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.

Some people may 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.

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.

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