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Coronavirus benefits
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Tax and NIC treatment of self-isolation payments

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Certain benefit claimants can claim a lump-sum payment of £500 if they have been instructed to self-isolate but can’t work from home. How does this affect their tax and benefits?

29th Jan 2021
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Regional differences

The nations making up the UK each have a different ‘test and trace’ Covid-19 procedure. This is a result of health being a devolved issue, so there are four different approaches and app names:

Each of the products in the UK nations endeavours to contain the spread of the Covid-19 by tracing contacts and advising that they should self-isolate, but there are differences.

Support payments

England, Wales and Scotland introduced support payments that can be applied for if the app advises a period of self-isolation, which all have different names:

At the time of writing, Northern Ireland has yet to introduce such a payment.

All of the support payments have the same basic concept: a payment of £500 to be made by the local authority upon application if the claimant meets the eligibility criteria. Research by BBC Newsnight has found that only 24% of applicants qualified for the payment.

National insurance

It is clear that the payment constitutes ‘earnings’ derived from an employment. As such, the Social Security Contributions and Benefits Act 1992 requires the earnings to be subject to Class 1 National Insurance Contributions. This means that, on payment, the local authority would have to account for and deducted employee and employer contributions.

To exempt the payment from being treated as either earnings or general earnings, two pieces of legislation were introduced:

This means the payments are not subject to national insurance contributions, Class 1 or Class 1A.

Tax treatment

There has been no definite ruling on the tax treatment from HMRC, but the professional bodies have concluded that the support payments in Great Britain are subject to Income Tax, and I agree with them.

The local authority should advise HMRC of the gross payments made to each individual. HMRC will try to collect the tax due by coding the payment into the claimant’s PAYE tax code, or if it is unable to do that, will pick it up as income at the end of the tax year in the P800 reconciliation.

For people who have received support payments and are self-employed, the Taxation of Coronavirus Support Payment Regulations (SI 2021/22) confirms the income tax treatment.

For sole-traders the support payment is treated as part of their taxable trading income. If the individual is a member of a partnership, the tax treatment depends on whether the income has been retained by the individual, and is therefore part of the individual's self employed income, or has been retained by the partnership and is therefore income of the firm.

The gross support payment will have to be declared on the claimant’s SA tax return, and further guidance will be needed as to exactly where the payment should be declared on the return.

Benefits income?

The low income tax reform  group (LITRG) understand that the support payments will not be counted as income for tax credits or universal credit. This follows the treatment of payments under the earlier self-isolation payment scheme piloted in parts of England.

Replies (1)

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Morph
By kevinringer
01st Feb 2021 13:10

It would be useful to have a definite tax guide to all covid payments because the tax treatment is not obvious (or at least, not to me). Take SEISS4 for example. A self-employed trader with 31 December 2021 year end claims SEISS4 on 10 April 2021. From both an accruals and cash basis that is during 2021-22, yet HMRC have said it will be taxable 2020-21. Another example, two businesses with 31 March 2020 year ends claim the £10,00 business rates grant. One receives payment on 31 March 2020, the other 1 April 2020. Which basis period do each fall in? Should they be apportioned over a period of time?

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