Low Incomes Tax Reform Group (LITRG) suggests the Government looks to make the £500 Test and Trace support lump sum payments free from income tax. This will make them simple for people to understand and less expensive to administer. LITRG is also concerned that the current proposals mean people risk an unexpected tax debt.
There is now a legal duty in England to self-isolate if a person tests positive for coronavirus or is told to do so by NHS Test and Trace.1 A £500 lump sum support payment is available for people in England on low incomes who cannot work from home and have lost income as a result of self-isolating.2 To qualify, the person must be employed or self-employed and in receipt of certain benefits. The payments are made by local authorities, who also have discretion to make payments even if the person is not in receipt of a qualifying benefit.3
The Government’s intention is that these payments are subject to income tax, although not subject to National Insurance contributions, for both employees and the self-employed.4
No details have been published for recipients about how the tax will be collected on these payments, but LITRG understands the payment is being paid gross by local authorities – that is, without any tax taken off at source and that local authorities are required to report details of the payments to HMRC.5
Victoria Todd, Head of LITRG, said:
“We suggest the Government reviews its decision to tax its payments. If they are paid gross by the local authority, recipients’ tax affairs could be vastly complicated. It is not clear how claimants of the payment will be informed about the potential tax liability.
“If a taxpayer is employed, HMRC will most likely try and collect the tax due by adjusting their PAYE code. Collecting tax in this way can lead to confusion if the person does not understand why the tax taken from the other source of income is higher than expected. The PAYE coding facility does not always work well. Codes can be fiendishly complicated to understand and check – and because tax is collected on an estimated basis, you may not have paid the right tax overall by the end of the tax year.
“If insufficient tax is paid, for example because someone loses their job, we believe that HMRC will try to identify and tax the payment in the end of year reconciliation process. This could leave individuals with an unexpected tax debt.”6
LITRG is also concerned that taxing the payments could lead to other unexpected consequences.
Victoria Todd said:
“There are potentially some complicated interactions with existing benefit rules. We are trying to seek clarification from HMRC and DWP on these points.7
“Given the current situation, keeping things worry-free and simple for individuals is more important than ever. Moreover, it appears the administration costs of collecting tax on the payments and dealing with the unintended consequences could outweigh the tax collected.
“It makes sense to rethink whether the payment should be free from tax. Failing that, HMRC and local authorities must ensure they make it clear to people that the payment is taxable and most importantly how and when tax will be collected. At present, information for recipients about how the tax will be collected is not available even though local authorities are already making payments.”
Notes for editors
1. From 28 September 2020, see https://www.gov.uk/government/news/new-legal-duty-to-self-isolate-comes-into-force-today
2. Announced in response to concerns that people were worried about self-isolating due to financial constraints. See: https://www.gov.uk/government/news/new-package-to-support-and-enforce-self-isolation
3. This relates to England. The nations of Scotland, Wales and Northern Ireland are implementing their own schemes.
4. See Department of Health & Social Care, Briefing and Q&A for local authorities on changes to Self-Isolation: https://www.local.gov.uk/sites/default/files/documents/Briefing%20and%20Q%26A%20for%20Local%20Authorities%20on%20changes%20to%20Self-Isolation.pdf
5. However, it appears that Regulations have only been laid to exclude the payments from Class 1 National Insurance for employees and not, as yet, Classes 2 and 4 for the self-employed.
It appears that the local authority will then notify HMRC of the payment to the individual – see for example: https://www.local.gov.uk/sites/default/files/documents/20200925%20Version%200.2%20ISSUED%20Test%20and%20Trace%20Support%20Payments%20Implementation%20Guide%20for%20Local%20Authorities%20in%20England%20%28002%29.pdf
6. And at a much later date. Support payments made now would fall into the 2020/21 tax year, which ends on 5 April 2021. The reconciliation process takes place after the year end – usually starting some time in the summer. It could therefore be almost a year before a person realises that they might have a 20 per cent (£100) tax bill on a payment they have long since spent. This liability could of course be higher if they have received more than one support payment.
7. The treatment for tax credits and universal credit does, however, need to be confirmed. Although we expect the payments will not be counted as income for tax credits and UC –if, for income tax, the payments are to be treated as ‘earnings’, it could follow that they are treated as employment income for tax credits and universal credit unless specific disregards are introduced.
8. It was reported at the weekend that the Scottish Government had written to the Treasury calling for the Self-Isolation Support Grant payments to be made free of income tax in order to maximise take-up - Covid in Scotland: Tax-free support call for self-isolation (BBC News, 18 October 2020)
9. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk/ Out of hours contact: George Crozier, 07740 477 374More Articles by Chartered Institute of Taxation (CIOT) ...