The £500 Covid bonus benefit trap
The Chartered Institute of Taxation’s Low Incomes Tax Reform Group (LITRG) is warning that some of the lowest paid workers stand to benefit the least from the Scottish Government’s new £500 bonus payment to NHS and care workers if the payment is taxed.
First Minister Nicola Sturgeon announced at yesterday’s SNP conference that a one-off payment of £500 would be made to full-time NHS and adult social care workers in recognition of their work during the Coronavirus pandemic and called on the UK Government to make the payment tax-free.
However LITRG said that because the payment is likely to be liable for tax as earnings, NHS and care workers receiving Universal Credit could see their benefits payments reduced as a result of the one-off payment.
For every extra £1 that a person receiving Universal Credit earns over and above their allowance, their benefit entitlement is usually reduced by 63p1.
It means that someone earning the median Scottish salary of £25,200 who also receives Universal Credit, could see the value of their bonus reduced from £500 to £123.95 once taxes and benefits are taken into account2.
Moira Kelly, chair of LITRG, said:
“We welcome that the Scottish Government has chosen to recognise the hard work of NHS and care staff during the pandemic, but it is important to point out that if the bonus is taxed, then those on some of the lowest incomes stand to benefit the least.
“For those receiving benefits like Tax Credits and Universal Credit, this would mean that any extra cash they receive may have a knock-on effect on the amount of benefit they are entitled to.
“As an example, someone receiving the median Scottish income of £25,200 could see their bonus reduced to £335 once tax and National Insurance is deducted.
“If they also received Universal Credit, then the value of the bonus would be reduced even further, to £123.95 because each additional £1 of earned net income sees Universal Credit reduced by 63 pence.
“Every taxpayer’s situation will be different, but the overall picture is that, unless the payment is made tax-free, recipients will end up with less than the headline amount, with some of those on the lowest incomes losing the most.”
Notes for editors
1. UK Government guidance on Universal Credit states: “The Universal Credit earnings taper rate is currently 63%. This means that for every £1 you earn over your work allowance (if you are eligible for one) your Universal Credit will be reduced by 63p. this amount will be deducted automatically from your Universal Credit payment.” (See Universal Credit earnings taper rate)
2. The median income figure is taken from The Scottish Government’s Income Tax Policy in the 2020-21 Budget: Analytical Note on Impacts on Income Levels and Equality since 2016-17.
A person earning £25,200 a year receiving the payment would pay £105 in income tax, and a further £60 in National Insurance on this payment. The value of the bonus would be £335 once these deductions are made.
A single parent with 2 children, with £150 per week childcare costs and £700 in private rent, with a salary of £25,200 would be entitled to approximately £1,020 per month in Universal Credit (UC).
If the £500 bonus payment is treated as earnings for tax purposes, the net amount of the bonus after tax and NI will be £335. It is likely that this will be added to the UC claimant’s earnings for that month and the UC taper rate of 63% would reduce the value of the payment by a further £211.05.
This means that the value of the bonus payment would be £123.95.
3. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.