Tax and NIC treatment of self-isolation paymentsby
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?
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:
- In England, it is called ‘NHS Test and Trace’
- In Wales, it is called ‘Test, Trace, Protect’
- In Scotland, it is called ‘Test and Protect’
- In Northern Ireland, it is called ‘Test, Trace and Protect’
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.
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:
- In England, it is called the Test and Trace Support Payment scheme
- In Wales, it is called the Self-isolation support scheme
- In Scotland, it is called the Self-Isolation Support Grant
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.
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:
- The Social Security Contributions (Disregarded Payments) (Coronavirus) (England) Regulations 2020 , which came into force on 22 October 2020
- The Social Security Contributions (Disregarded Payments) (Coronavirus) (Scotland and Wales) Regulations 2020 which come into force on 5 January 2021
This means the payments are not subject to national insurance contributions, Class 1 or Class 1A.
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.
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.
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Ian Holloway is a highly respected payroll practitioner, writer, advisor and trainer. He has worked in the payroll profession for over 30 years and is now Payroll Consultant at i-Realise, an independent change management business operating in the payroll space. Ian has hands-on experience processing payrolls from all sectors, large and small....