Cemap 1 Topic 5- State Benefits and HMRC Tax Credits Flashcards
How do state benefits affect financial planning?
State benefits can affect financial planning in two main ways.
1) State benefits can affect the need for financial protection. The amount of additional cover needed by a client can be quantified as the difference between the level of income or capital required and the level of cover already existing. Existing provision includes not only any private insurance that the client already has, but also any state benefits to which they or their
dependants would be entitled.
2) Financial circumstances can affect entitlement to benefits. Certain benefits are means‑tested. This might mean that a financial plan that increased a person’s income or the value of their assets might be less attractive than it seemed at first sight, if it also had the effect of reducing entitlement to Income Support.
What support is available for people on low income?
Universal Credit
Universal Credit is a means‑tested benefit for people of working age. The upper age limit is at the point where people qualify for Pension Credit.
Universal Credit is one benefit for people whatever their employment status. The intention is that people will not need to keep transferring from one type of benefit to
another as their circumstances change.
From April 2013, Universal Credit began to replace the following benefits:
- Income Support;
- Income‑based Jobseeker’s Allowance;
- Income‑related Employment and Support Allowance;
- Working Tax Credit and Child Tax Credit;
- Housing Benefit.
The amount of Universal Credit depends on their income and personal and financial circumstances.
There is an ‘earnings disregard’, which is based on the claimant’s needs.
For example, a couple with children have a higher earnings disregard than a couple without children. As earnings increase, entitlement to Universal Credit is reduced, and there is a maximum cap on the total amount of state benefits that a household can receive (based on the average earnings of a working family); this maximum includes any Child Benefit that they receive.
The benefits that will remain outside of Universal Credit include:
- Carer’s Allowance;
- Contribution‑based Jobseeker’s Allowance and Contribution‑based Employment and Support Allowance;
- Disability Living Allowance/Personal Independence Payment;
- Child Benefit;
- Statutory Sick Pay;
- Statutory Maternity Pay;
- Maternity Allowance;
- Attendance Allowance (as this is for claimants over 65 anyway).
Working Tax Credit
Working Tax Credit is designed to top up the earnings of employed or self‑employed people who are on low incomes; this includes those who do not have children. There are extra amounts for:
- working households in which someone has a disability; and
- the costs of qualifying childcare.
Working Tax Credit has now been replaced by Universal Credit and new claims can only be made for those already receiving Child Tax Credit.
Income Support
Income Support is a tax‑free benefit designed to help people aged between 16 and the qualifying age for state Pension Credit whose income is below a certain level and who are working less than 16 hours per week.
Existing claims continue to apply to those who already receive the benefit and continue to meet the eligibility requirements. New claims for Income Support can no longer be made, but those on low incomes can apply for Universal
Credit.
Jobseeker’s Allowance
Jobseeker’s Allowance is a benefit for people who are unemployed or working less than 16 hours and actively seeking work. There are two forms of JSA: contribution‑based and income‑based. Income‑based JSA is being replaced by Universal Credit.
People are eligible for contribution‑based JSA only if they have paid sufficient Class 1 National Insurance contributions. It is paid at a fixed rate, for a maximum of six months. Payments are made gross but are taxable. Claimants are usually credited with National Insurance contributions (NICs) for every week that they receive JSA.
Support for Mortgage Interest loan
Those in receipt of Income Support, Jobseeker’s Allowance, Universal Credit or Pension Credit can apply for assistance to pay the interest on their mortgage.
Support for Mortgage Interest (SMI) was a pure state benefit until April 2018 but now takes the form of a loan that must be repaid.
SMI will pay interest on a mortgage up to an upper threshold (with a lower threshold if a claim is being made for Pension Credit). SMI does not pay for associated mortgage costs, such as the repayment of capital, insurance
premiums or mortgage arrears. Payment is made direct to the mortgage lender at a standard mortgage rate that may be more or less than the actual rate on the mortgage.
The SMI loan is secured on the property by way of a second charge and is subject to interest. The loan is repaid when the property is sold or ownership of the property is transferred.
What support is available for those bringing up
children?
Statutory Maternity Pay
Women who become pregnant while employed may be able to receive Statutory Maternity Pay from their employer, providing that:
- their average weekly earnings are above a certain threshold;
- they have been working for their employer continuously for 26 weeks prior to their ‘qualifying week’, which is the 15th week before the week in which their baby is due.
SMP is payable for a maximum of 39 weeks. The earliest it can begin is 11 weeks before the baby is due and the latest is when the baby is born.
There are two rates of SMP: for an initial period, the amount paid is equal to a percentage of the employee’s average weekly earnings; after that, the remaining payments are at a standard flat rate or set percentage of the employee’s average weekly earnings, whichever is the lower.
SMP is taxable and NICs are due on the amount paid.
Maternity Allowance
Some women who become pregnant are not able to claim SMP, including those who are self‑employed or have recently changed jobs or stopped working. They might be able to claim an alternative benefit called Maternity Allowance. This is paid by the Department for Work and Pensions (DWP) and not by employers.
Maternity Allowance is not a benefit available to all women who become
pregnant; an individual must meet the relevant eligibility criteria in order to
claim.
Maternity Allowance is paid at a lower rate than SMP but it is not subject to tax or NICs on the amount paid. Like SMP, it is payable for a maximum of 39 weeks. The earliest it can begin is 11 weeks before the baby is due and the
latest is when the baby is born.
Child Benefit
Child Benefit is a tax‑free benefit available to parents and others who are responsible for bringing up a child. It does not depend on having paid NICs. It is not affected by receipt of any other benefits.
Child Benefit is available for each child under age 16. It can continue up to and including age 19 if the child is in full‑time education or on an approved training programme. A higher rate is paid in respect of the eldest child and a
lower rate in respect of every other child.
Child Benefit is means‑tested in the form of an income tax charge if either of a couple has individual adjusted net annual income over the threshold. If both have adjusted net income above the threshold, it is assessed on the higher
of the two incomes. The tax charge is collected through self‑assessment and is applied at a rate such that, where adjusted net income reaches a specified level above the threshold, the tax charge equals the Child Benefit paid.
Child Tax Credit
Child Tax Credit is designed to provide financial assistance to people who are responsible for bringing up children and are on low incomes. A claim may be made by an individual who is responsible for:
- a child aged under 16;
- a child under 20 in eligible education or training
Child Tax Credit is made up of a number of different payments called ‘elements’. How much is received depends on an individual’s income, the number of children, and whether any of the children are disabled.
Child Tax Credit is being replaced by Universal Credit and is not open to new claims except for individuals who are already claiming Working Tax Credit.
What support is available for people who are sick or disabled?
Statutory Sick Pay (SSP)
(SSP) is paid by employers to employees who are off work due to sickness or disability for four days or longer, providing their average weekly earnings are above the level at which NICs are payable.
Employment and Support Allowance
People who are ill or disabled may be able to claim Employment and Support Allowance (ESA). There are two forms of ESA. Contribution‑based ESA, where the individual is eligible for Universal Credit, depends on a person’s NICs. Contribution‑based ESA is not means‑tested and the payments are taxable.
In contrast, income‑based ESA does not depend on NICs and is means‑tested, but is not taxable.
Attendance Allowance
Attendance Allowance is a benefit for people who have reached state pension age and need help with personal care as a result of sickness or disability. This benefit is not means‑tested and it does not depend on NICs.
There are two levels of benefit: a lower rate for people who need help with personal care by day or by night and a higher rate for those who need help both by day and by night.
Disability Living Allowance and Personal Independence Payment
Disability Living Allowance is a tax‑free benefit for people who need help with personal care and/or need help getting around. It is currently being replaced by Personal Independence Payment (PIP) for people aged between
16 and state pension age.
There are two components to both benefits, and people may be eligible for either or both:
- Care component: this component is for people who need help in carrying out daily tasks such as washing, dressing, using the toilet or cooking a meal.
- Mobility component: this component applies if a person has difficulty in walking or cannot walk at all.
Carer’s Allowance
Carer’s Allowance is a benefit for people who are caring for a sick or disabled person; they do not have to be a relative of the
patient in order to qualify.
The right to receive CA does not depend on having paid NICs. It is taxable and
must be declared on tax returns. Claiming CA can affect the other benefits the claimant receives, as well as the benefits the person they are caring for receives.
What support is available for people in retirement?
State pensions are payable from state pension age (SPA).
The first review recommended that state pension age be increased to age 68 between 2037 and 2039.
State pension benefits changed from April 2016 with the introduction of the new state pension. Before this date, state pension provision consisted of a basic state pension with an additional earnings‑related element
for those who were employed. The new state pension is a single‑tier pension with no earnings‑related element.
Those reaching SPA before 6 April 2016 have their state pension benefits paid under the system of basic + additional state pensions. Those reaching SPA on or after 6 April 2016 receive the new state pension, with an adjustment paid to compensate them if they would have been better off under the previous
system.
The basic state pension
The basic state pension was paid only to employed people on their retirement and was not related to their earnings. It was later extended to include self‑employed people and others who have made sufficient National
Insurance contributions – which means that they have contributed for at least 30 years. Benefits are scaled down for lower contribution rates.
Additional state pension
Some employees who reached state pension age before 6 April 2016 are entitled to an additional state pension.
Additional state pension was available only
to employed people who paid Class 1 National Insurance contributions. Self‑employed people could not build entitlement to additional state pension benefits. Employed people had the option to ‘contract‑out’ of SERPS/S2P and
have the NICs that would have been used to provide SERPS/S2P reduced or redirected to an alternative form of pension.
New state pension
New, simplified state pension for those reaching retirement age on or after 6 April 2016. There is a single level of benefit with no additional earnings‑related element. Pension benefits are determined by a person’s National Insurance contribution record. To be eligible for the maximum pension, an individual needs to have made or been credited with 35 years’ NICs; those with under 10 years’ NICs are not usually eligible for any state pension. Carers are credited with NICs.
One of the features of the new state pension is that it is based solely on an individual’s personal National Insurance record. It is not possible for those reaching state pension age before 6 April 2016 to claim the new state pension.
Anyone who reached state pension age before 6 April 2016 will continue to receive benefits according to the old system.
THE ‘TRIPLE LOCK GUARANTEE’
Once in payment, both the basic state pension and the new state pension increase each year by the higher of:
- earnings (measured by the Average Weekly Earnings Index);
- prices (as measured by the Consumer Prices Index); or
- 2.5 per cent.
This is referred to as the ‘triple lock guarantee’
PENSION CREDIT
Pension Credit is made up of two elements:
- Guarantee Credit – this tops up an individual’s weekly income to a specified minimum amount.
- Savings Credit – this is an additional payment for people aged 65 and over who have saved some money towards their retirement.
Pension Credit is not taxable. People who reach state pension age on or after 6 April 2016 are not usually eligible for Savings Credit.
