Topic 5: State benefits and HMRC Tax Credits

Question 1

What is Benefits cap?

Answer 1

A cap on the amount of certain state benefits that an individual or family can receive each week. Broadly equivalent to the average UK wage.

Question 2

What is means tested?

Answer 2

State benefits where eligibility is limited to those with income below a specified amount and/or savings/capital below a specified amount.

Question 3

What is basic state pension?

Answer 3

The basic element of the state pension payable to those who reached state pension age before 6 April 2016. Those who were employed may also have earned additional state pensions through a graduated pension, SERPS or S2P.

Question 4

What is new state pension?

Answer 4

A flat rate, higher state pension, payable to those who reach state pension age on or after 6 April 2016, with no additional pensions payable. Those who reach state pension age on or after 6 April 2016 receive the higher of the flat rate pension or the basic state pension plus additional pensions earned before 6 April 2016.

Question 5

State benefits can affect financial planning in two main ways?

Answer 5

1) State benefits can affect the need for financial protection.
2) Financial circumstances can affect entitlement to benefits.

Question 6

What is Universal Credit?

Answer 6

Universal Credit is a means‐tested benefit for people of working age. The upper age limit is the point where people reach state pension age.

Universal Credit is not specifically an ‘in work’ or ‘out of work’ benefit; it 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. The structure is intended to be much simpler than that of the current system, where separate benefits (which often overlap) are administered by different agencies, with different methods of means testing.

Question 7

From April 2013, Universal Credit began to replace which benefits?

Answer 7

• Income Support;
• Income‐based Jobseeker’s Allowance;
• Income‐related Employment and Support Allowance;
• Working Tax Credit and Child Tax Credit;
• Housing Benefit.

Question 8

The benefits that remain outside of Universal Credit include?

Answer 8

• Carer’s Allowance;
• new style Jobseeker’s Allowance and new style 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 state pension age
  anyway).

Question 9

What is working tax credit?

Answer 9

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.

Question 10

What is income support?

Answer 10

Income Support is a tax‐free benefit which was designed to help people aged between 16 and state pension age whose income was below a certain level and who were working less than 16 hours per week (if they had a partner, their partner must work less than 24 hours per week). It was available to people with no income at all or it could be used to top up other benefits or part‐time earnings.

Existing claims continue for those who 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.

Question 11

What is Jobseekers Allowance?

Answer 11

Jobseeker’s Allowance (JSA) is a benefit for people who are unemployed or working less than 16 hours and actively seeking work. There are two forms of JSA: new style and income‐based. Income‐based JSA is being replaced by Universal Credit.

People are eligible for new style JSA only if they have paid sufficient Class 1 National Insurance contributions. It is paid at a fixed rate, irrespective of savings or partner’s earnings, 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.

Question 12

What is Support for Mortgage Interest Loan?

Answer 12

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.

For eligible claimants, 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.

Question 13

What is Statutory Maternity Pay?

Answer 13

Women who become pregnant while employed may receive Statutory Maternity Pay (SMP) 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.

Question 14

What is maternity allowance?

Answer 14

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 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

Question 15

What is Child Benefit?

Answer 15

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.

Question 16

What is Child Tax Credit?

Answer 16

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 being replaced by Universal Credit and is not open to new claims except for individuals who are already claiming Working Tax Credit.

Question 17

What is Statutory Sick Pay (SSP)?

Answer 17

Statutory Sick Pay (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 Class 1 NICs are payable.

SSP is paid for a maximum number of weeks in any spell of sickness. Spells of sickness with less than a minimum number of weeks between them count as one spell. Amounts paid as SSP are liable to income tax and to Class 1 NICs, just as normal earnings would be.

Question 18

What is Employment and support allowance?

Answer 18

People who are ill or disabled may be able to claim Employment and Support Allowance (ESA). There are two forms of ESA. For new style ESA, eligibility depends on a person’s NIC record. New style 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 not taxable.

Question 19

What is attendance allowance?

Answer 19

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.

Question 20

What is Disability Living Allowance and Personal Independence Payment?

Answer 20

Disability Living Allowance (DLA) 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. People born on or before 8 April 1948 can continue to claim DLA, but those born after that date will need to apply for PIP or Attendance Allowance depending on their age.

Question 21

What is carers allowance?

Answer 21

Carer’s Allowance (CA) is a benefit for people who are caring for a sick or disabled person; they do not have to be a relative of the person they are caring for 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.

Question 22

What about people in hospital or receiving residential/ nursing care?

Answer 22

When people are in hospital, some of the needs normally met by state benefits or pensions are instead met by the NHS. In general terms, state benefits that were being claimed will continue to be paid when someone goes into hospital.