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Long-term sick to become much poorer

Published on 2 March 2010

Government plans to move existing incapacity benefit claimants on to employment and support allowance could cause serious reductions in income for thousands of people. LITRG are concerned that the full tax and tax credits impact of proposed changes have not been fully evaluated.

Employment and support allowance (ESA) was introduced in October 2008 and from that date no new claims to incapacity benefit (IB) have been allowed.

There are two types of ESA – the non-taxable ‘income-based’ and the taxable ‘contribution-based’. As the names suggest, claimants qualify for the former if they are on very low incomes, but qualification for the latter is based upon claimants’ employment history and resulting National Insurance contributions record.

Proposed changes

The Government has proposed that existing IB claimants be migrated in phases to the taxable contribution-based ESA. For most, this will not create any difference in their tax position or entitlement to tax credits or other benefits; but for the 294,000 who have been on IB since April 1995, there could be a significant problem.

The Government has undertaken that claimants should not lose out on the amount of benefit they receive when they move from IB to ESA. Yet people who have been on IB since April 1995 or before – former invalidity benefit claimants – will lose out in the amount of cash they have in their pockets. Hitherto, they have received IB tax-free. Now, this ‘transitional protection’ given at the time of the switch in 1995 to IB is to be discontinued.

The people affected are likely to be among those with the most permanent and difficult disabilities.

These proposals are outlined in the explanatory memorandum submitted by the Department for Work and Pensions to the Social Security Advisory Committee.

The complex impact on former invalidity benefit claimants

A simple switch from tax-free IB to taxable ESA is itself significant, giving many in the affected group a 20% reduction in their benefit to the extent that it exceeds their personal allowances for tax; but even more worrying is the impact on the tax credits claim of the household.

The tax-free IB is currently excluded from the income calculation for tax credits. But when it is replaced by taxable ESA, under current tax credit rules, the benefit will be included in the calculation, and that could result in tax credits being taken away at the rate of 39p in the £.

Moreover, ‘passported benefits’ – such as help with housing, council tax, healthcare costs and prescription charges – could be lost. So overall, an additional tax liability coupled with reduced tax credits and other benefits could leave the household dramatically worse off.

Surely some mistake?

We cannot believe that politicians have fully understood the impact of these proposals upon some of the most disadvantaged people in the UK.

We have written to the Social Security Advisory Committee suggesting that the Government must take into account all of the complex interactions mentioned earlier in this article, particularly for those who have been on IB continuously for the last fifteen years.

We have also pointed out that the proposed phased migration will give rise to unfairness if some claimants of the existing tax-free IB are moved to taxable ESA before others.

(02-03-2010)

Contact: Victoria Todd (Tel: 0844 579 6700 Fax 0844 579 6701)

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