Swings and roundabouts: Tax and welfare interaction in the coronavirus age

In the last couple of months, many individuals have experienced financial loss, but most of them have been able to turn to the State for support in the form of the Job Retention Scheme and now also the Self-Employed Income Support Scheme (SEISS). However, if you are in receipt of one of those grants, and also claiming universal credit (UC) or a contribution-based benefit, , how do they interact and what should you be looking out for?

Much about the present situation is unprecedented, not least the huge upswing in UC take-up: of 4.2 million people in receipt of UC as at 9 April 2020, 1.2 million had claimed in the four weeks since 13 March. The welfare benefits system also has a role in alleviating sudden falls in income.

Not everyone can access the government grants intended to help employers, their employees and the self-employed during the worst of the crisis. For example, someone who started a business in 2019/20 is not eligible for SEISS as that is payable to those who were trading in 2018/19 and completing the self-employed or partnership pages of a tax return. Similarly, only employers who are furloughing their employees can join the Job Retention Scheme: other employers may be asking their employees to work reduced hours for reduced pay, or making them redundant, depending on the circumstances.

Either way, workers may need to claim UC to replace lost or reduced earnings. A diminishing number of families are still in receipt of child and working tax credits (3.8 million in 2017/18, rather fewer now), and those who would have claimed one of the benefits that UC is replacing must now claim UC.

There is some very good material about tax and the coronavirus crisis online, such as these postings by the ICAEW Tax Faculty, and of course the official guidance accessible from the HMRC landing page. In a blog this size there is only room to skim the surface, but a detailed and comprehensive treatment of the subject can be found on the Low Incomes Tax Reform Group’s coronavirus guidance.

Universal credit and furlough pay

If a UC claimant is put on furlough, their UC will generally increase because furlough pay from the Job Retention Scheme is 80% of usual pay, and UC (being means-tested) increases as pay and income from other sources go down. However, UC is based on monthly assessment periods which may not exactly match the claimant’s pay periods at work, particularly if the payment is variable.

UC is assessed monthly on a very crude cash-in, cash-out basis, and this brings its own complications. If there is a delay between receipt of the last payment of wages and the start of furlough pay, there may be a month in which no pay at all is coming in, and UC will increase to compensate. The following month, two amounts of furlough pay may arrive in the same assessment period – if the double pay cheque means the claimant is at or close to the upper limit for UC entitlement, at best they will receive little or no UC; at worst they may lose their entitlement and have to reclaim. The latter situation can result in hideous complications. In addition, they lose one month’s work allowance, or the amount one is allowed to earn in a month before UC is reduced.

The self-employed can also claim UC, and the minimum income floor to which they are normally subject is suspended for the duration of the coronavirus outbreak.

But beware: anyone who is in receipt of tax credits or certain other benefits should think carefully before claiming UC, as a claim automatically terminates entitlement to the other benefit, whether successful or not. The conditions of entitlement are not the same for UC as for the benefits it replaces and, once UC has been claimed, it is generally not possible to go back and reclaim the old benefit. For example, tax credit claimants with savings may find that the amount of those savings disqualifies them from universal credit. Also, one is not necessarily better off on UC than on a legacy benefit such as tax credits; it is important to carry out a better-off calculation before claiming the former.

People on UC who can afford to put money aside may benefit from the government-incentivised Help to Save scheme.

Off work through illness

From 13 March 2020, statutory sick pay (£94.25 per week) is payable from Day 1 for those who are too ill to work, self-isolating for COVID-19, or caring for a household member who is self-isolating. Those who are not eligible for statutory sick pay (for example, because they are self-employed, or employed but their pay falls below the lower earnings limit of £120 per week) should be able to claim UC depending on their circumstances, or new-style employment and support allowance (ESA) (the new name for contribution-based ESA) if they have paid enough national insurance contributions (NICs).

The contribution conditions for new-style ESA are, very broadly, that enough Class 1 or Class 2 NICs have been paid or credited in the last two years, with relaxations in certain circumstances. It can be claimed alongside, or instead of, UC. This table provides a useful summary of the circumstances in which one may be entitled to each.

Pension drawdown

A worker aged 55 or older may be tempted to draw on a pension to supplement reduced earnings. When deciding on this, one should bear in mind that for purposes of UC and other means-tested benefits, regular withdrawals will be treated as income which will reduce entitlement, and a one-off withdrawal will be treated as capital. If the amount of the one-off withdrawal together with other savings amounts to more than £16,000, UC entitlement will be lost.

For those who still receive tax credits, a one-off withdrawal will not affect entitlement, but a regular payment will increase income and potentially build up an overpayment if not reported straight away to HMRC.

High-income child benefit charge (HICBC)

If a person is earning more than £50,000 per annum, and they or their partner is in receipt of child benefit, they may be liable to the HICBC. If, as a result of the coronavirus outbreak, their income falls below £50,000, they will no longer be liable to the HICBC. If, instead, they or their partner has opted out of receiving child benefit in order not to become liable to the HICBC, they can again claim child benefit (which is paid on a weekly basis).

Robin Williamson

Written by Robin Williamson

Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a part-time senior policy adviser at the Office of Tax Simplification from 2018 to 2019. In May 2020 he won the lifetime achievement award at the Tolley Taxation Awards. He was recently appointed UK country reporter to the Observatory on the Protection of Taxpayer Rights at the IBFD.

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