Scotland’s independent think tank
Scotland’s independent think tank

Taxable benefits – Alison Payne

Today Reform Scotland has published a briefing which includes a policy recommendation that Scotland should change the administration arrangements for Carer’s Allowance when it is devolved to Scotland following the passing of the Scotland Bill 2015/16.

Carer’s Allowance is a taxable benefit. In other words, although the government is giving you some money, it wants to take some of that same money back. However, the government will not tax benefits at source. This means that it is up to the individual to ensure the money is paid back, mainly through a decrease in their personal allowance or self-assessment. Carer’s Allowance is not the only taxable benefit, though it is the only taxable benefit that is due to be devolved to Scotland.

There are a number of other taxable benefits. One of which I am personally in receipt of. In November 2015, my husband died from Non-Hodgkin’s Lymphoma. As we have two young children I was entitled to claim Widowed Parent’s Allowance. This benefit is based on my husband’s National Insurance contributions, so is a contributory benefit and not means-tested.

When the letter arrived confirming I was to receive it, I needed to phone the DWP to check some details. As I sat on hold I started skimming through the small print of the benefit and found a line referring to it being taxable. The information was a bit unclear, so when I was speaking to the advisor I asked if she could clarify what this meant as surely the tax would be taken at source. I was informed that the DWP could not tax at source. Instead, what must happen is that the receiver needs to get in touch with HMRC to notify them that they are in receipt of a taxable benefit. HMRC will then adjust your tax code, in effect lowering your personal allowance, so that you pay more tax on your earnings to cover the tax due on the benefit.

To me this seemed a very complicated, inefficient and certainly not user friendly way for the government to give you some money, but then take some of that same money back. In other words it’s like someone giving you £100 and saying they would like £20 back. But they won’t just give you £80 and refuse to take back £20 of the £100 they gave you. Instead you have to go to a cash machine and get a different £20.

I can understand that the government may want to vary the amount given in benefits to take account of the earnings of the individual, so people on different tax rates will end up receiving more or less of the benefit. However, it is a very inefficient way of operating. There is no reason why the government could not tax at source. Companies, pension providers and a wide range of organisations who regularly give payments to individuals have to, and are able to, give the individuals the required amount, less what is due in tax, and pay that tax direct to the government.  So surely the government can do the same.

The devolution of a taxable benefit to Scotland, therefore, gives the Scottish Government an opportunity to look at doing things differently, to create an administration that is more efficient but also better for the user.

Reform Scotland has called on the Scottish Government to create one government department for tax and welfare, which will also bring additional benefits in terms of transparency and accountability as welfare is split between HMRC and DWP at Westminster. Having one department should help achieve this end.

It is also worth considering that many of the taxable benefits, listed below, are benefits individuals receive when they are potentially going through a period of upheaval and change. As a result, individuals may not notice the small print about the benefit being taxable and find that they are then faced with a tax bill that they cannot afford.

The following other benefits are taxable:

  • the State Pension
  • Jobseeker’s Allowance
  • Employment and Support Allowance (contribution based)
  • Incapacity Benefit (from the 29th week you get it)
  • Bereavement Allowance
  • pensions paid by the Industrial Death Benefit scheme
  • Widowed Parent’s Allowance
  • Widow’s pension

Reform Scotland believes that such a system is overly complicated, inefficient and not at all user-friendly. However, since a taxable benefit, Carer’s Allowance, is being devolved to Holyrood, there is an opportunity to create a better system of administration, thereby leading Westminster by example.