How is tax collected on taxable state benefits?
When state benefits are paid, it can be difficult to understand how tax is paid on them. This page explains how tax on taxable state benefits interacts with the Pay As You Earn (PAYE) system.
If you receive taxable state benefits, it is important to be aware that although they are taxable, no tax is taken off at source.
On their own, they will probably be below the threshold for paying tax (£12,570 for most people in 2022/23, which works out at about £242 per week or £1,048 per month).
However where your other sources of taxable income (such as from employment) plus the taxable state benefits mean that you go over the £12,570 threshold, then you will have to pay tax on some of your total taxable income.
Here we explain more about how tax due on taxable state benefits interacts with the PAYE system.
How do I know which state benefits are taxable?
It comes as a surprise to many people that some state benefits, such as the state pension, are taxable. On our page State benefits we look at many state benefits and state whether or not they are liable to income tax.
You do need to be careful because some benefits, like Employment and Support Allowance (ESA) and Jobseeker's Allowance (JSA) can be taxable if they are paid based on National Insurance contributions you have made, or can be non-taxable if they are instead means-tested (based on your financial situation). Also be careful that receipt of some benefits can affect claims to tax credits or to universal credit. Our page on State benefits states whether that is the case.
You can also get further information on the various benefits on GOV.UK, by searching on that site using the name of the individual benefit.
How do HMRC know I am being paid these benefits?
The Department for Work and Pensions (DWP) has direct links to HM Revenue & Customs (HMRC) to tell them about these benefits. For example, DWP sends a daily update to HMRC identifying people to whom it is going to start paying a pension, the weekly amount and the date from which it is payable. Any changes to the amount payable are advised similarly. There is a slightly different system to advise HMRC when annual increments take place, but these are all advised in advance of the new sum becoming payable.
Broadly similar systems operate for taxable ESA and JSA.
Other taxable benefits do not have such sophisticated systems and we recommend you contact HMRC when you begin receiving any taxable state benefits to ensure you do not end up with an unexpected tax bill.
Of course, all of these systems depend on your correct National Insurance number being available so that the records can properly link.
How are state benefits other than ESA and JSA taxed?
There are special rules for taxing ESA and JSA that are explained below.
The state benefit that is most commonly taxable is the state pension. The DWP does not operate Pay As You Earn (PAYE) on the state pension or many other state benefits. This means that the full amount of the benefit is paid to you.
If you have another source of income that is paid through PAYE, for example from an employment or another regular UK pension payment, HMRC will try to collect the tax due on the state pension or other taxable benefit by changing the tax code used by your employer or pension provider. You can read about that on our page How do I check my coding notice?
Not all state benefits may be automatically included in coding notices, but you can ask HMRC to do that.
Sometimes it is not possible for HMRC to collect all of the tax through your PAYE code and, if that is the case, they will contact you to arrange payment of the additional tax. This could be by way of a form P800 or a simple assessment.
If you have no other PAYE income, then HMRC will collect any tax due on a state pension by issuing a simple assessment or, in other cases where you are required to complete a Self Assessment tax return, by collecting the tax due as part of the Self Assessment calculation.
Since the DWP does not operate PAYE on the state pension and many other benefits, this means it also does not issue you with the normal forms associated with PAYE. So, you will not receive a form P60 after the end of the tax year setting out how much state pension you have received in the tax year. Instead, you should receive a notification before the start of the tax year of what the weekly amount of your state pension will be.
The amount that is taxable in that year is not necessarily the amount you have received in the tax year, rather it is the amount to which you are entitled in the tax year. The state pension is paid in arrears and often on a four-weekly basis but you need to work out how many weeks you were due to receive your pension for.
Joni receives her state pension on a 4-weekly basis. Her state pension rate for 2022/23 is £185.15 per week. In 2021/22 the weekly rate was £179.60. For the purposes of this example, we assume the rate for 2023/24 is £190 per week.
In 2022/23, Joni receives the following payments, every 4 weeks on a Thursday:
- 14 April £729.50
- 12 May £740.60
- 9 June £740.60
- 7 July £740.60
- 4 August £740.60
- 1 September £740.60
- 29 September £740.60
- 27 October £740.60
- 24 November £740.60
- 22 December £740.60
- 19 January £740.60
- 16 February £740.60
- 16 March £740.60
Joni also receives a payment in 2023/24 on 13 April 2023 of £750.30.
Joni received £9,616.70 in 2022/23. However, the first payment included two weeks relating to 2021/22. In addition, the first payment received in 2023/24 included two weeks relating to 2022/23.
So, Joni should not be taxed on £9,616.70 for 2022/23 – the amount received during the tax year. Joni should be taxed on £9,627.80 (52 weeks at £185.15) – the amount she is entitled to for 2022/23.
£9,627.80 should be the amount taken into account in her tax code. There are no other adjustments in her code, so it should be:
Total allowances and reliefs: personal allowance
Total deductions: value of state pension
Total tax free income allowed for 2022/23
The code of 294L tells Joni’s employer that Joni can only receive £2,942.20 of tax free income in 2022/23. Note that if Joni had been a Scottish taxpayer her tax code would have had a prefix of ‘S’. If Joni had been a Welsh taxpayer her code would have had a prefix of ‘C’.
How are ESA and JSA taxed?
First, remember it is only contributions based or new style ESA that is taxable. Income related (means-tested) ESA is not taxable. Similarly, only contributions based or new style JSA is taxable.
DWP (who pays these benefits) operates a modified PAYE system on these payments. When you claim one of these benefits, you need to hand over any P45 you have received from a previous employer. The P45 shows income paid to date in the tax year as well as tax deducted from it. DWP will pay you the full amount of any benefit due, with no tax deduction or refund. Either at the end of the tax year (5 April) or when you cease receiving the taxable benefit, whichever comes first, DWP will process your pay and tax details to the relevant date and make a tax repayment, if one is due. If extra tax is due, this will be notified to HMRC and they will make arrangements to collect it.
If you are still receiving taxable ESA or JSA at the end of a tax year, DWP will issue you with a form P60(U) Or P60 (ESA) showing sums paid to you by DWP during the tax year as well as income paid and tax deducted from previous jobs.
If you stop claiming ESA or JSA during the tax year, DWP will issue you with a form P45(U) or P45 (ESA) showing the sums paid to you by DWP during the tax year as well as income paid and tax deducted from previous jobs. You should give this to any new employer.
Where can I find more information?
HMRC publish a PAYE manual that covers the taxation of certain state benefits from PAYE70000 onwards.
Our section on Tax credits and benefits gives information on which state benefits are taxable.