To tax or not to tax – which state benefits come with a tax bill?


We often get asked about the tax on state benefits. Many people think that they’re all tax-free….but they’re not.

Therefore, we’ve put together a list of the main benefits and the tax implications for them.

Taxable benefits

The following benefits are taxable if your income is above the annual tax-free personal allowance.

  • state pension
  • widow’s pension
  • carer’s allowance
  • incapacity benefits (from week 29)
  • jobseeker’s allowance
  • contribution-based employment and support allowance
  • statutory maternity/paternity/adoption pay
  • statutory sick pay
  • bereavement allowance
  • widowed parent’s allowance

Non-taxable state benefits

The following benefits can be received tax free. They are not included in your taxable income and do not affect your personal tax-free allowance.

  • working tax credit
  • child tax credit
  • income support
  • universal credit
  • pension credit
  • housing benefit
  • income-related employment and support allowance
  • guardian’s allowance
  • maternity allowance
  • industrial injuries benefit
  • disability living allowance
  • severe disablement allowance
  • lump sum bereavement payments
  • winter fuel payments and Christmas bonus
  • free TV licence for over 75s
  • war widow’s pension
  • young person’s bridging allowance.

Child benefit

Child benefit is tax-free. However, if either you or your partner earns more than £50,000, then some (or all) of the benefit is repayable as a “high income child benefit tax charge”.

The key fact is that only one of you needs to earn more than £50,000 to trigger the repayment.

This charge is calculated as 1% of the child benefit received for every £100 by which your income exceeds £50,000. If your income is £60,000, you repay all of the child benefit.

Example

You have two children and received £1,788 in child benefit last year. You earn £56,000 for the year. You must repay 60% of the child benefit.

This is calculated by 1% x (£56,000 – £50,000)/£100 = 60%. Therefore, you will repay £1,788 x 60% = £1,073.

If you know that your income (or your partner’s) will exceed £60,000, you can stop claiming the benefit rather than claim it and repay it.

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Any questions?

If you’d like a meeting or a Skype call with a Liverpool accountant to discuss this, please give us a ring on 0151 380 3800 or drop us an email at [email protected].

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Added by Jon Davies
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