Taxable and Non-Taxable State Benefits in the UK

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Taxes always seem to be a part of life that we simply can’t escape, and understanding the rules around taxable and non-taxable state benefits in the UK is crucial for everyone. Whether you’re receiving child benefits, disability allowances, or unemployment support, it’s essential to know which of these benefits count as taxable income and which do not. 

The rules surrounding this are not universal; they depend on the type of benefit, your personal circumstances, and the legislation in place. Introduced and governed by HMRC, these regulations have evolved over the years, often shifting to reflect economic conditions and government policy. 

Knowing the ins and outs of these guidelines can help you avoid any unexpected tax bills and keep your finances in order.

Taxable State Benefits in the UK

When it comes to state benefits in the UK, not all of them are exempt from taxation. Some benefits are considered part of your taxable income and must be declared on your Self Assessment tax return or are taxed at source by HMRC. 

It’s important to keep track of these, as under-declaring your taxable benefits can result in fines or additional tax liabilities.

Bereavement Allowance

Bereavement Allowance is provided to individuals aged 45 or older but under the state pension age, who do not have dependent children, and whose spouse or civil partner passed away before 6 April 2017. It is payable for up to 52 weeks. For those whose partners died on or after this date, 

Bereavement Support Payment may apply. This allowance is taxable and is treated as social security income for tax credits, while it counts as unearned income for universal credit purposes.

Carer’s Allowance

Carer’s Allowance is provided to those who care for someone for at least 35 hours per week. The person being cared for must be receiving qualifying disability benefits. Carer’s Allowance is a taxable benefit, and it counts as social security income for tax credits and as unearned income for universal credit.

Carer’s Allowance Supplement (Scotland Only)

The Carer’s Allowance Supplement is an additional payment made by the Scottish Government twice a year to individuals who are already receiving Carer’s Allowance and live in Scotland. The supplement is taxable, though it does not count as income for tax credits. However, it is considered unearned income for universal credit.

Carer Support Payment (Scotland Only)

Carer Support Payment is gradually being introduced in Scotland to replace Carer’s Allowance. This benefit supports individuals providing care in addition to the Carer’s Allowance Supplement. Carer Support Payment is taxable, and for universal credit purposes, it is counted as unearned income, though only up to the maximum that would be received if the claimant were entitled to Carer’s Allowance.

Employment and Support Allowance (New Style)

New Style Employment and Support Allowance (ESA) is designed for individuals who have limited capability for work due to illness or disability. Eligibility depends on National Insurance contributions, and the benefit is taxable. ESA counts as social security income for tax credits and as unearned income for universal credit.

Employment and Support Allowance (Contribution-Based)

Contribution-based ESA provides support for individuals with limited capability for work due to illness or disability, replacing the Incapacity Benefit in 2008. It is a taxable benefit. For tax credits, it is counted as social security income and as unearned income for universal credit.

Jobseeker’s Allowance (New Style)

New Style Jobseeker’s Allowance is available to individuals who are actively seeking work and have met National Insurance contribution requirements. This allowance is taxable and is considered social security income for tax credits and unearned income for universal credit.

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Jobseeker’s Allowance (Contribution-Based)

Contribution-Based Jobseeker’s Allowance is for individuals who are actively seeking work and have fulfilled National Insurance contribution requirements. This form of allowance is taxable and is counted as social security income for tax credits and unearned income for universal credit.

State Retirement Pension

The State Pension is paid to individuals who have reached their state pension age and is based on their National Insurance contributions. It is a taxable income and is included in tax credit calculations. The first £300 of pension income is disregarded for tax credits, while the full amount is counted as unearned income for universal credit.

Statutory Adoption Pay

Statutory Adoption Pay provides financial support to employees who take time off to adopt a child, covering up to 39 weeks. This benefit is taxable. For tax credits, the first £100 per week is disregarded, and the remainder counts as income. The full amount is treated as earned income for universal credit.

Statutory Maternity Pay

Statutory Maternity Pay supports employees who take leave before and after the birth of a child and is paid for up to 39 weeks. It is taxable, with the first £100 per week disregarded for tax credits, while the rest counts as income. The full amount is considered earned income for universal credit.

Statutory Parental Bereavement Pay

Statutory Parental Bereavement Pay is offered to employees in England, Scotland, and Wales for up to two weeks in the event of the death of a child under 18 or a stillbirth after 24 weeks of pregnancy. Introduced in 2020, this benefit is taxable. 

For tax credits, the first £100 of weekly payments is disregarded, and the remainder is counted as income. The full amount is treated as earned income for universal credit.

Statutory Paternity Pay

Statutory Paternity Pay is available to employees whose partner has given birth or adopted a child, offering up to two weeks of paid leave. This benefit is taxable, with the first £100 of weekly payments disregarded for tax credits, while anything above this is considered income. It is counted in full as earned income for universal credit.

Statutory Shared Parental Pay (ShPP)

Statutory Shared Parental Pay allows parents to share paid leave in the first year following the birth or adoption of a child. This benefit is taxable. For tax credits, the first £100 of weekly payments is disregarded, with the remainder counting as income. The full amount is treated as earned income for universal credit.

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Statutory Sick Pay

Statutory Sick Pay (SSP) is provided to employees for up to 28 weeks of sick leave. This benefit is taxable and is counted in full as income for tax credits. SSP is also treated as earned income for universal credit purposes.

Widowed Parent’s Allowance

Widowed Parent’s Allowance is available to individuals who receive child benefits for at least one child and whose spouse, civil partner, or cohabiting partner died before 6 April 2017. This taxable benefit has been largely replaced by Bereavement Support Payment for newer claims. 

Tax credits are considered pension income, with the first £300 disregarded, while universal credit is fully counted as unearned income.

Non-Taxable State Benefits in the UK

There are several state benefits in the UK that are completely free from tax, allowing you to receive financial assistance without worrying about an additional tax burden. 

For those relying on state support for essential living costs, understanding which benefits are non-taxable can offer peace of mind and prevent unnecessary financial strain.

Adult Disability Payment (Scotland)

Adult Disability Payment, introduced in Scotland in 2022, is a form of disability assistance that is gradually replacing Personal Independence Payment (PIP) and Disability Living Allowance (DLA) for adults in Scotland. 

This benefit is designed to support individuals with long-term health conditions or disabilities. Importantly, Adult Disability Payment is not taxable and does not count as income for tax credits or universal credit.

Armed Forces Independence Payment

The Armed Forces Independence Payment supports members of the Armed Forces who have been severely injured as a result of their service since 2005. This benefit aims to assist those who have sustained significant disabilities due to their military service. It is not subject to tax and does not affect eligibility for tax credits or universal credit.

Attendance Allowance

Attendance Allowance is a non-means-tested benefit provided to individuals who have reached state pension age and require help with personal care due to their disability. This benefit is administered by the Department for Work and Pensions (DWP). It is not taxable and does not count as income for tax credits or universal credit.

Bereavement Payment

Bereavement Payment offers a one-off lump sum to individuals whose spouse or civil partner died before 6 April 2017, provided they had paid sufficient National Insurance contributions or died due to their job. 

This payment is replaced by Bereavement Support Payment for deaths occurring on or after 6 April 2017. It is not taxable and does not count as income for tax credits or universal credit, though it can be considered as capital for universal credit.

Bereavement Support Payment

Introduced on 6 April 2017, Bereavement Support Payment replaces earlier bereavement benefits. It includes a tax-free lump sum and monthly payments for up to 18 months, with higher rates for those with children. This benefit is not taxable and does not count as income for tax credits. 

For universal credit, the initial lump sum is disregarded from capital for the first twelve months, and the ongoing payments are disregarded as income.

Budgeting Loans

Budgeting Loans are part of the social fund, offering interest-free financial support for specific expenses to those on certain benefits. They are being phased out in favor of Budgeting Advances for Universal Credit claimants. Budgeting Loans are not taxable and do not count as income for tax credits or universal credit.

Child Benefit

Child Benefit is a non-means-tested payment for those responsible for a child or qualifying young person. It is administered by HM Revenue & Customs (HMRC). 

Although child benefits are not taxable, high earners may face a tax charge. It does not count as income for tax credits or universal credit.

Child Tax Credit

Child Tax Credit is a means-tested benefit for families with children or qualifying young persons, paid by HMRC. It is designed to support families on lower incomes and is being phased out in favor of universal credit. Child Tax Credit is not taxable and does not count as income for tax credits.

Child Disability Payment (Scotland Only)

The Child Disability Payment, introduced in Scotland, replaces Disability Living Allowance (DLA) for children. It provides financial support to families with disabled children up to age 18. This payment is not taxable and does not affect eligibility for tax credits or universal credit.

Christmas Bonus

The Christmas Bonus is a one-off payment made to some benefit claimants during the holiday season. It is intended as a festive boost and is not taxable. This payment does not count as income for tax credits or universal credit.

Cold Weather Payment

Cold Weather Payments are issued to those receiving qualifying benefits when temperatures drop below a certain threshold. These payments help offset the costs of heating during cold spells. They are not taxable and do not count as income for tax credits or universal credit.

Cost of Living Payments

To assist with rising living costs, the government has introduced cost-of-living payments for those receiving certain benefits or tax credits. These payments are designed to offer additional financial support and are not taxable. They do not count as income for tax credits or universal credit.

Council Tax Reduction

Council Tax Reduction provides financial relief on council tax bills for low-income households. Administered locally, this scheme replaced the Council Tax Benefit in April 2013. It is not taxable and does not affect eligibility for tax credits or universal credit.

Disability Living Allowance

Disability Living Allowance (DLA) supports those under 16 who have mobility issues or need personal care. For adults, it has been replaced by Personal Independence Payment (PIP). DLA is not taxable and does not count as income for tax credits or universal credit.

Discretionary Housing Payment

Discretionary Housing Payments are provided by local authorities to cover rent shortfalls where Housing Benefit does not meet the full rent. These payments are not taxable and do not count as income for tax credits or universal credit.

Employment and Support Allowance – Income-Related

Income-Related Employment and Support Allowance assists those with limited work capability due to illness or disability who have not paid enough National Insurance contributions. It replaced Income Support for disability claims and is non-taxable. It does not count as income for tax credits and may provide the maximum tax credits.

Funeral Payment
The Funeral Payment helps with funeral costs for those receiving qualifying benefits. This payment is intended to alleviate the financial burden of arranging a funeral. It is not taxable and does not count as income for tax credits or universal credit.

Guardian’s Allowance

Guardian’s Allowance supports individuals who are caring for a child whose parents have died or are unable to care for them. It is administered by HMRC and is not taxable, nor does it count as income for tax credits or universal credit.

Healthy Start

The Healthy Start scheme provides vouchers for milk, fruit, and vegetables to those receiving certain benefits. This scheme aims to improve the health of families with young children. Healthy Start is not taxable and does not count as income for tax credits or universal credit.

Help with Health Costs

Help with Health Costs offers assistance with medical expenses for those on certain benefits or low incomes. This support helps cover healthcare costs. It is not taxable and does not affect eligibility for tax credits or universal credit.

Housing Benefit

Housing Benefit is a local authority-administered benefit for those on low incomes who need help paying their rent. It is being phased out and replaced by universal credit. Housing Benefit is not taxable and does not count as income for tax credits or universal credit.

Income Support

Income Support provides financial assistance to those who are not required to work, such as carers and parents with very young children. It is gradually being replaced by universal credit. 

Income Support is not taxable, except when received during a trade dispute, and does not count as income for tax credits unless during a trade dispute.

Industrial Injuries Disablement Benefit

Industrial Injuries Disablement Benefit supports individuals disabled by an accident or disease related to their work. This benefit is non-taxable and does not count as income for tax credits, though it is considered unearned income for universal credit, with some exceptions.

Maternity Allowance

Maternity Allowance is available to those who are pregnant or recently gave birth and do not qualify for Statutory Maternity Pay. This includes self-employed individuals. Maternity Allowance is not taxable and does not count as income for tax credits but is considered unearned income for universal credit.

Pension Credit

Pension Credit assists older individuals on low incomes, combining Guarantee Credit and Savings Credit. It aims to ensure a minimum income level for retirees. Pension Credit is not taxable and does not count as income for tax credits or universal credit.

Personal Independence Payment

Personal Independence Payment (PIP) supports working-age individuals with long-term health conditions or disabilities. It replaces Disability Living Allowance (DLA) for adults. PIP is non-taxable and does not count as income for tax credits or universal credit.

Reduced Earnings Allowance

Reduced Earnings Allowance is for individuals who cannot earn their usual income due to work-related accidents or diseases. It is not taxable and does not count as income for tax credits, although it is considered unearned income for universal credit.

Scottish Child Payment

The Scottish Child Payment provides financial support to low-income families with children in Scotland. It is designed to help with the costs of raising children. This payment is not taxable and does not affect eligibility for tax credits or universal credit.

Severe Disablement Allowance

Severe Disablement Allowance was provided to those who had been off work for an extended period due to disability, but no new claims were accepted. It is non-taxable and does not count as income for tax credits, though it counts as unearned income for universal credit.

Sure Start Maternity Grant

Sure Start Maternity Grant is aimed at low-income families to assist with the costs of a new baby. It is a one-off payment designed to provide financial relief. This grant is not taxable and does not count as income for tax credits or universal credit.

Universal Credit

Universal Credit is a comprehensive benefit that replaces six older benefits, including income support and housing benefits. It provides support for low-income individuals and families. Universal Credit is not taxable and cannot be claimed alongside tax credits.

Vaccine Damage Payment

Vaccine Damage Payments offer financial support to individuals who have been severely disabled due to vaccinations against certain diseases. The lump sum payment is non-taxable. For tax credit purposes, it does not count as income for children but may affect capital if invested.

War Disablement Pension

The War Disablement Pension supports individuals injured as a result of their military service. This pension is non-taxable and does not count as income for tax credits or universal credit.

War Widow’s or Widower’s Pension

This pension is for individuals whose spouse or civil partner died as a result of military service. It provides financial support to bereaved partners. It is non-taxable and does not affect eligibility for tax credits or universal credit.

Winter Fuel Payment

Winter Fuel Payments help older individuals with the cost of heating during winter. The payment varies based on circumstances but is generally between £100 and £300. This payment is tax-free and does not count as income for tax credits or universal credit.

Working Tax Credit

Working Tax Credit supports low-income individuals who are employed but earn below a certain threshold. It is designed to top up wages for those working fewer hours. Working Tax Credit is non-taxable, but it is being replaced by universal credit, making it impossible to claim both simultaneously.

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How HMRC Handles Taxation of State Benefits?

HMRC manages the taxation of state benefits through a variety of methods depending on your income situation. If you receive a state pension and have no other PAYE (Pay As You Earn) income, HMRC typically handles your tax obligations by issuing a simple assessment. 

This straightforward approach ensures that any tax due on your state pension is collected efficiently. However, if you are required to complete a self-assessment tax return, HMRC will incorporate the state pension into the overall tax calculation, ensuring that any tax liabilities are settled as part of the self-assessment process. 

This system allows for accurate and comprehensive management of your tax responsibilities related to state benefits.

Conclusion

By recognising which benefits are subject to taxation and which are not, individuals can better manage their finances and avoid unexpected tax liabilities. Whether you’re navigating taxable benefits like Carer’s Allowance and Employment and Support Allowance or enjoying the relief of non-taxable benefits such as Child Benefit and Disability Living Allowance, staying informed helps ensure compliance with HMRC regulations and optimises your financial well-being.

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