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HMRC internal manual

PAYE Manual

PAYE operation: incapacity benefit: introduction

Incapacity Benefit (IB)

 (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Incapacity Benefit was introduced on 13 April 1995 to replace Invalidity Benefit and Sickness Benefit. It is administered and paid by the Department for Work and Pensions (DWP) (in Northern Ireland, the Social Security Agency).

Note: This benefit was replaced by Employment and Support Allowance from 27 October 2008; existing Incapacity Benefit awards at that date will continue to be paid. 

Prior to the introduction of the PAYE Service, Incapacity Benefit was centralised in the Leics and Northants (IBTO). The DWP operates a modified PAYE scheme for Incapacity Benefit cases, please refer to PAYE77070 for more information.

All notifications to HMRC that Incapacity Benefit has either started or ceased will be in paper format using PAYE in-year forms, DWP are unable to electronically send this information.

The Employment Income (EIM) Manual at EIM76001 onwards gives information about Incapacity Benefit and tells you what is taxable. The main points to be aware of are

Incapacity Benefit is payable at 3 rates

  • Short Term Lower
  • Short Term Higher
  • Long Term

The Short Term Lower rate which is paid for the first 28 weeks of sickness (except where Statutory Sick Pay is payable instead), is not taxable. Claimants who until 13 April 1995 were entitled to Invalidity Benefit are not chargeable to tax on Incapacity Benefit due after that date, so long as their claim is unbroken.

Incapacity Benefit normally stops at state pension age, but people receiving Invalidity Benefit who reached state pension age before 13 April 1995 can claim non-taxable Incapacity Benefit for a further 5 years.

Employees cannot claim Incapacity Benefit until Statutory Sick Pay (SSP) finishes, but where an employer continues to pay sick pay after SSP, taxable Incapacity Benefit can be received at the same time.

Incapacity Benefit is finishing as of 31 January 2011, after this date no new Incapacity Benefit claims can start and all existing Incapacity Benefit claims will be reassessed.

Incapacity Benefit reassessment

Reassessment of existing Incapacity Benefit claimants will take place between October 2010 and 5 April 2014.

Where an individual is reassessed and found to have limited or no capacity to work, they will be transferred from Incapacity Benefit to Employment and Support Allowance (ESA) and will receive ESA at the same rate as previously received for Incapacity Benefit.

Following reassessment

  • Live Incapacity Benefit employments will be ceased


  • Primary ESA employment will be created where the start date is later than the current primary employment


  • Potentially ceased primary ESA employment will be created where the start date is earlier the current primary employment


  • Secondary ESA employment will be created where live primary occupational pension employment is held

Where secondary ESA employment is created and Incapacity Benefit has been coded

  • The existing Incapacity Benefit amount held in IABD will be apportioned to the day before ESA start date


  • ESA will be estimated, based on the Incapacity Benefit rate, from the start date to the end of the tax year and entered into IABD

The total Incapacity Benefit and ESA coded deduction will equal the Incapacity Benefit coded deduction held before Incapacity benefit was ceased. If the individual queries the tax code issued following reassessment, see PAYE77025.

Note: P45(IB)(O) will still be received but before processing you must determine whether the case being reviewed is a reassessment case, see PAYE77035.

Further guidance on reassessment cases can be found at PAYE77210.