Income support

Clause 665: Exempt unless payable to member of couple involved in trade dispute

2637.     This clause derives from section 151(1)(b) of ICTA.

2638.     It contains the basic rule that income support is taxable only if it is payable to a member of a couple and the claimant but not the claimant's partner is on strike. (Section 151 of ICTA refers to Part 5 of the Social Security Act 1986. In accordance with the Social Security (Consequential Amendments) Act 1992 that reference is to be read as being to section 126 of the Social Security Contributions and Benefits Act 1992. Some publishers have updated the text to help the reader). If both are on strike, there is no benefit "in respect of the relevant couple" (see paragraph 2648 and clause 668) and nothing is taxable. There is a similar rule for jobseeker's allowance in clause 673 (see paragraph 2669).

2639.     Clauses 666 to 668 (see paragraphs 2642 to 2653) contain other limitations to the charge on income support.

2640.     The clause includes no reference to the rule in section 151(1)(a) of ICTA because, in the circumstances described in that paragraph (the application of the "available for work" test), income support is no longer payable. The claimant would now be entitled to jobseeker's allowance instead.

2641.     So the Bill does not rewrite the rule in section 151(1)(a) of ICTA which is no longer needed.

Clause 666: Child maintenance bonus

2642.     This clause sets out the first restriction to the charge on income support. It derives from section 617(2)(ad) of ICTA.

2643.     It deals with the exemption from tax for a child maintenance bonus paid under the Child Support Act 1995. That Act provides that the bonus is to be treated as income support (or jobseeker's allowance). So the exemption appears in this clause. The corresponding exemption for a bonus treated as jobseeker's allowance is in clause 670 - see paragraph 2657.

Clause 667: Amounts in excess of taxable maximum

2644.     This clause deals with the second restriction to the charge on income support. It derives from section 151(3) of ICTA.

2645.     Subsection (1) sets out the restriction. No more than the "taxable maximum" of the benefit is taxable. This term is used in section 151(3) of ICTA. The clause retains it as a useful and clear label for the amount that has to be calculated by applying the rules in clause 668.

Clause 668: Taxable maximum

2646.     This clause sets out how to calculate the "taxable maximum", which is used in applying the restriction in clause 667(1). The clause derives from section 151(5) and (7) of ICTA. Those subsections tax only the part of the benefit that is attributable to the person involved in the strike.

2647.     The rules are complicated because they have to deal with:

• amounts of income support that are attributable to persons other than the person involved in the strike; and

• benefit payable for a period of less than a week.

2648.     Subsections (1) and (2) set out how to calculate the "taxable maximum" for a week. Subsection (1) is the rule for the simple case where the amount of income support derives from the circumstances of the couple alone. Subsection (2) is the rule for the case where the benefit includes amounts for other people, such as children or adult dependants.

2649.     In either case the clause restricts the tax charge to one half of the amount of the benefit attributable to the couple.

2650.     The charge on income support is in section 151 of ICTA rather than section 617 of ICTA. So the general exemption for an increase in benefit for a child in section 617(1)(b) does not apply. But the definition of "taxable maximum" in section 151 ensures that any such increase is never taxed.

2651.     Income support is included in the table of taxable United Kingdom benefits (clause 660). So the general exemption for any increase in the benefit for a child applies (clause 676). The clauses exempt this increase twice: once in subsection (2) of this clause in calculating the "taxable maximum" for income support, and again (generally) in clause 676. This double exemption does not present any difficulties.

2652.     Subsection (3) gives the method for calculating the "taxable maximum" if the benefit is payable for a period of less than a week. The clause uses a method statement and a formula to make the rule easier to understand.

2653.     It is not clear why a fraction of one-sixth is used in section 151(5) of ICTA. It was probably carried forward from the days of supplementary and unemployment benefit. The clause uses one-seventh as the fraction. This brings the clause into line with both the relevant social security regulations: regulation 73 of SI 1987 No 1967 (income support) and regulation 150 of SI 1996 No 207 (jobseeker's allowance). See Change 144 in Annex 1

Clause 669: Interpretation

2654.     This clause contains the meanings of the expressions used in clauses 667 and 668. It is new.

2655.     It specifies that:

• "Married couple" means a man and woman who are married to each other and are members of the same household.

• "Unmarried couple" means a man and woman who are not married to each other but are living together as husband and wife.

Jobseeker's allowance

Clause 670: Child maintenance bonus

2656.     This clause sets out the first restriction to the charge to tax on jobseeker's allowance. It derives from section 617(2)(ad) of ICTA.

2657.     The clause deals with the exemption from tax for a child maintenance bonus paid under the Child Support Act 1995. That Act provides that the bonus is to be treated as jobseeker's allowance (or income support). So the exemption appears in this clause. The corresponding exemption for a bonus treated as income support is in clause 666 - see paragraph 2643.

Clause 671: Amounts in excess of taxable maximum

2658.     This clause deals with the second restriction to the charge to tax on jobseeker's allowance. It derives from section 151A of ICTA.

2659.     Subsection (1) sets out the restriction. No more than the "taxable maximum" of the benefit is taxable. This term is used in section 151A(2) of ICTA. The clause retains it as a useful and clear label for an amount that has to be calculated by applying the rules in clauses 672 to 674.

2660.     There are two types of jobseeker's allowance: income-based and contribution-based. The amount of a contribution-based allowance is determined simply by the claimant's age. But a couple may also qualify for an income-based addition to a contribution-based allowance, to bring the allowance up to the amount of income support.

2661.     In the case of a couple, the taxable maximum is based on what would have been payable to the couple as an income-based allowance.

2662.     The rules are complicated because they have to deal with:

• the difference between an income-based allowance and a contribution-based allowance;

• amounts of jobseeker's allowance that are attributable to persons other than the claimant;

• a person involved in a strike being prevented from claiming the allowance; and

• an allowance payable for a period of less than a week.

Clause 672: Taxable maximum: general

2663.     This clause sets out how to calculate the "taxable maximum", for use in clause 671. It derives from section 151A(3) of ICTA.

Clause 673: Taxable maximum: income-based jobseeker's allowance

2664.     This clause sets out how to calculate the "taxable maximum" for a week in the case of an income-based allowance. It derives from section 151A(4), (6) and (8) of ICTA.

2665.     Subsection (2) sets out the rule for a single person. The taxable maximum is based on the amount of the contribution-based allowance which would have been payable to the person, excluding any amount of the allowance that is for other people such as children or adult dependants.

2666.     Subsection (3) sets out the general rule for a member of a couple. The taxable maximum is the "applicable amount", excluding any amount of the allowance that is for other people such as children or adult dependants.

2667.     The charge on an income-based jobseeker's allowance is in section 151A of ICTA rather than section 617 of ICTA. So the general exemption for an increase in benefit for a child in section 617(1)(b) does not apply. But the definition of "taxable maximum" in section 151A ensures that any such increase is never taxed.

2668.     Jobseeker's allowance is included in the table of taxable United Kingdom benefits (clause 660). So the general exemption for any increase in the benefit for a child applies (clause 676). The clauses exempt this increase twice: once in subsection (3) of this clause in calculating the "taxable maximum" for jobseeker's allowance, and again (generally) in clause 676. This double exemption does not present any difficulties.

2669.     Subsection (4) sets out the special rule that applies if one member of a couple is involved in a strike. There is a similar rule for income support (see clause 665).

Clause 674: Taxable maximum: contribution-based jobseeker's allowance

2670.     This clause sets out how to calculate the "taxable maximum" for a week in the case of a contribution-based allowance. It derives from section 151A(5) and (7) of ICTA.

2671.     Subsection (2) sets out the rule for a single person. The taxable maximum is based on the amount of the "age-related amount" applicable to the person, excluding any amount of the allowance that relates to other people such as children or adult dependants.

2672.     Subsection (3) sets out the general rule for a member of a couple. The taxable maximum is based on the amount of the income-based allowance which would have been payable to the person, excluding any amount of the allowance that relates to other people such as children or adult dependants.

2673.     The charge on a contribution-based jobseeker's allowance is in section 151A of ICTA rather than in section 617 of ICTA. So the general exemption for an increase in benefit for a child in section 617(1)(b) does not apply. But the definition of "taxable maximum" in section 151A ensures that any such increase is never taxed.

2674.     Jobseeker's allowance is included in the table of taxable United Kingdom benefits (clause 660). So the general exemption for any increase in the benefit for a child applies (clause 676). The clauses exempt this increase twice: once in subsection (3) of this clause in calculating the "taxable maximum" for jobseeker's allowance, and again (generally) in clause 676. This double exemption does not present any difficulties.

Clause 675: Interpretation

2675.     This clause contains the meanings of the expressions used in the rules in clauses 671 to 674.

• The "applicable amount" is the "age-related amount", less some earnings and pension receipts. It is usually the level to which income is made up by income support.

• A "contribution-based jobseeker's allowance" is one based on the claimant's Class 1 contributions in the two years before the year of claim.

• An "income-based jobseeker's allowance" is one based on the claimant's income.

• "Married couple" means a man and woman who are married to each other and are members of the same household.

• "Unmarried couple" means a man and woman who are not married to each other but are living together as husband and wife.

Clause 676: Increases in respect of children

2676.     This clause exempts the part of a benefit that is for a child. It derives from section 617(1)(b) of ICTA.

Chapter 5: UK social security benefits wholly exempt from income tax

Overview

2677.     This Chapter sets out the United Kingdom benefits that are not charged to tax.

2678.     This Chapter deals with the benefits that are never taxable. Chapter 4 deals with the benefits that are sometimes taxable.

Clause 677: UK social security benefits wholly exempt from tax: Table B

2679.     This clause introduces and sets out the table ("Table B") of exempt benefits. It derives from section 617(1)(a) and (2) of ICTA.

2680.     Subsection (1) introduces the second of the tables ("Table B"). This table lists the exempt United Kingdom benefits. The first table ("Table A") is in clause 660 - see paragraph 2606.

2681.     In order to make the exemptions simple and consistent the phrase "no liability to income tax arises" is used throughout the Bill to express exemption from tax. See Note 28.

2682.     Part 1 of the table identifies each benefit by the section of the social security Act under which it is paid. Part 2 of the table identifies the benefits that are paid under regulations. The table also identifies the corresponding Northern Ireland provisions.

2683.     The table arranges the benefits in alphabetical order. This means that a particular benefit should be easy to find. And it should be easy to maintain the clarity of the table because it will be easy to insert any new benefit into the table in the right place.

2684.     Disabled person's tax credit and working families' tax credit are abolished by section 1(3) of the Tax Credits Act 2002. They are not taxable. The exemption is preserved by paragraph 88 of Schedule 7 to the Bill.

2685.     Subsection (2) is a signpost to the special treatment of industrial death benefit. This benefit is part of industrial injuries benefit, which appears in Table B and is not generally taxable. But industrial death benefit is a pension and is charged to tax in the pension income Part.

Chapter 6: Taxable foreign benefits

Overview

2686.     This Chapter sets out the rules for taxing foreign social security benefits.

2687.     There is no explicit charge on foreign social security benefits in ICTA. But the benefits arise from rights under foreign social security law and those rights are "possessions out of the United Kingdom" (section 18(3) of ICTA). So the income is assessable under Schedule D Case V.

2688.     The Bill includes an explicit charge to tax on foreign social security benefits. See Change 145.

Clause 678: Taxable benefits: foreign benefits

2689.     This clause identifies the foreign benefits that are taxable. The clause is new. The taxable foreign benefits are part of "taxable benefits" (clause 657(3)).

2690.     Subsection (1)(a) uses words similar to those used in section 318(2)(c) of ICTA (war pensions) to identify the foreign benefits that are taxable. Subsection (1)(b) reproduces the territorial restriction in paragraph (a)(i) of Schedule D (section 18(1) of ICTA). A foreign social security benefit is charged to tax only if it is payable to a United Kingdom resident.

2691.     Subsection (2) is a boundary rule. It provides that a foreign social security benefit that is also a pension is taxed only once, in the pension income Part. United Kingdom benefits that are pensions are identified in the pension income Part and do not appear in Table A. So there is no overlap. But it is theoretically possible for a foreign benefit within this clause to take the form of a pension. In that case, the boundary rule ensures that the benefit is charged as a pension and qualifies for the one-tenth deduction in section 65(2) of ICTA.

Clause 679: Taxable social security income

2692.     This clause deals with the basis of assessment. It identifies the amount of taxable social security income, which feeds into the computation of net taxable social security income in clause 658. The clause invokes sections 65, 68, 584 and 585 of ICTA.

2693.     In ICTA the basis of assessment for a foreign social security benefit is given by the rules of Schedule D Case V. The social security income Part does not repeat those rules but cross-refers the reader to them. The rules are in section 65 of ICTA and include the remittance basis. Section 65 is modified by the rules for Irish income in section 68 of ICTA. Sections 584 and 585 of ICTA are also relevant. Section 584 gives relief for income taxed on an arising basis if that income cannot be remitted to the United Kingdom. Section 585 gives relief for income taxed on a remittance basis if the remittances are delayed.

Clause 680: Person liable for tax

2694.     This clause provides that the person chargeable is the person receiving or entitled to the income. It derives from section 59(1) of ICTA.

2695.     Paragraph 2687 explains that the charge on foreign social security benefits in ICTA is under Schedule D. So section 59(1) of ICTA applies to charge the person receiving or entitled to the income.

Chapter 7: Taxable and other foreign benefits: exemptions

Overview

2696.     This Chapter sets out the foreign benefits that are not charged to tax. It is new.

Clause 681: Taxable and other foreign benefits: exemptions

2697.     The clause derives from ESC A24. The Bill legislates the ESC that exempts certain foreign benefits from tax. In practice the ESC is applied not only to the benefits set out in the ESC but to all foreign benefits that correspond to exempt United Kingdom benefits. The clause reflects this. See Change 146.

2698.     In order to make the exemptions simple and consistent the phrase "no liability to income tax arises" is used throughout the Bill to express exemption from tax. See Note 28.

2699.     Subsection (1) deals with foreign benefits that correspond to the taxable UK benefits listed in Table A. It exempts the foreign benefits to the same extent that the United Kingdom benefits are exempt income because of one of the rules in Chapter 4. The definition of "exempt income" is in clause 656(2).

2700.     Subsection (2) deals with the foreign benefits that correspond to the exempt UK social security benefits listed in Table B (in Chapter 5). These foreign benefits are not substantially similar to the taxable UK benefits listed in Table A. So they are not covered by subsection (1). But they are wholly exempt from tax. The phrase "no liability to tax" removes not only a charge under this Part but any charge to income tax.

Part 11: Pay As You Earn

Overview

2701.     Part 11 provides for the Pay As You Earn system (generally known as "PAYE"). Under PAYE tax is deducted at source from payments made by employers and others. PAYE is the primary means of collecting income tax on PAYE income (broadly employment income, most pension income and social security income). The details are left for regulations made by the Board. The Bill:

• provides the powers to make PAYE regulations and issue tax tables;

• extends PAYE to some persons and payments not otherwise covered; and

• allows alternatives to PAYE in some circumstances.

2702.     Chapter 1 introduces the Part and gives the meaning of "PAYE income".

2703.     Chapter 2 requires the Board of Inland Revenue to make regulations for the assessment and collection of income tax on PAYE income. These "PAYE regulations" may (among other things) require employers and others to deduct tax from payments of PAYE income.

2704.     Chapter 3 is the first of two Chapters dealing with special provisions. It covers clauses which deal with special types of payer or payee.

2705.     Chapter 4 is the second Chapter dealing with special provisions. It deals with PAYE on the provision to employees of vouchers or of assets readily convertible into money, and the proceeds arising from share schemes.

2706.     Chapter 5 allows the PAYE regulations to provide for "PAYE settlement agreements" (PSAs) between employers and the Inland Revenue. Under these, employers can agree to meet the income tax liabilities of their employees on some expenses and benefits in kind. The agreement replaces the normal processes of PAYE and assessment.

2707.     Chapter 6 contains miscellaneous and supplemental material.

Approach taken in Part 11

2708.     The legislation for PAYE spans over 50 years (see the history below). It is (and always has been) divided between primary legislation and regulations made by the Board. Part 11 of the Bill does not change this broad division. It mainly:

• brings the legislation into consistent, more modern language;

• breaks up some long, complex sections in ICTA to help readers see what is done where;

• rearranges provisions to bring together at the start the main powers for the Board to make regulations and to reveal better the result of changes since the consolidation in 1988;

• brings into the primary legislation some provisions from regulations in order to give readers a more complete set of provisions in this Part; and

• omits material which is now redundant.

Added material

2709.     Clause 692 is new. It deals with organised arrangements for sharing tips which are not dealt with in ICTA but only in the PAYE regulations (see regulation 5 of SI 1993 No 744).

2710.     But the main additions to the clauses are from the regulations for notional payments (the Income Tax (Employments) (Notional Payments) Regulations 1994, SI 1994 No 1212). Much of those regulations is incorporated in clauses 693 to 695, 697, 701, 702 and 710. The balance will be incorporated in the PAYE regulations. This changes neither the law nor practice as the Bill reproduces the regulations currently in force. The only effect is that the primary legislation, unlike the regulations, will not be capable of amendment by regulations made by the Board; and that readers have all the PAYE legislation in just two chunks - this Part and the PAYE regulations.

Omitted material

2711.     This Part also omits some bits of legislation which, on close examination, are now not necessary. The commentary on each clause gives details of minor omissions. But there are two other bits of legislation which are omitted altogether.

Section 139(4) of FA 1994

2712.     The first is section 139(4) of FA 1994 which is unnecessary. See Note 56 in Annex 2.

Section 205(1) to (3) and (5) of ICTA

2713.     The second is section 205(1) to (3) and (5) of ICTA. Section 205(1) to (3) of ICTA provides that an assessment of income need not be made in certain cases. The introduction of self assessment for income tax made that redundant. See Note 62 in Annex 2.

Background

2714.     PAYE is the biggest part of the income tax system; and for many people their only contact with income tax. There are 1.5 million PAYE schemes operated by employers, pension providers and others. They deal with around 35 million employments, offices, pensions and so on. (In the rest of this commentary, as in the PAYE regulations, "employee" is generally used to mean anyone getting income within the scope of PAYE. "Employer" and "employment" should generally be read accordingly.) Most of the £160 billion income tax and national insurance contributions collected by the Inland Revenue comes through PAYE.

2715.     The core of PAYE is deduction at source. This means that employers deduct tax when they make payments to employees. The amount they deduct depends on:

• PAYE tables issued by the Inland Revenue for employers and employees generally;

• a PAYE code issued by the Inland Revenue for each individual employee and employment; and

• the amount the employer pays and (usually) the cumulative total of previous payments in the tax year.

2716.     The PAYE code:

• gives each employee the allowances and reliefs to which they are likely to be entitled for the tax year;

• subtracts any allowances needed to cover other employment income - eg benefits in kind such as company cars; and

• can also collect underpayments of tax from earlier years.

2717.     As a result the majority of employees never have to make a lump sum payment to the Inland Revenue. Employees remain liable for income tax on the basis of their income for the tax year. But PAYE deductions from their income are in effect "payments on account" of that tax bill. So more often than not employees end the year having paid the right amount of tax or near enough the right amount for the difference to be dealt with by collecting an underpayment through PAYE in a later year (or by repaying employees if it turns out too much has been deducted).

2718.     The PAYE tables give employees an equal share of their allowances and reliefs each week or month. Combined with the way PAYE deductions are usually worked out using the total payments to date (the "cumulative basis") this means that employees:

• pay tax evenly over the year; and

• are far more likely to pay the right amount of tax by the end of the year.

2719.     These were objectives of PAYE from the outset.