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HMRC internal manual

PAYE Manual

PAYE operation: incapacity benefit: how incapacity benefit is taxed

Incapacity Benefit (IB) is taxed in one of two ways

  1. Where the claimant has a continuing PAYE source, it is coded through the IABD screen in the Incapacity Benefit area. As the benefit is only payable to people who are unfit for work, the PAYE source will normally be either
* An occupational pension


* Non-statutory sick pay from an employer
  1. In other cases, the Department for Work and Pensions (DWP) operates a modified form of PAYE and deducts tax at source. These cases are dealt with centrally by a specialist district - Leics and Northants (IBTO) (This content has been withheld because of exemptions in the Freedom of Information Act 2000) , with two exceptions
* Annual repayment claims, which remain the responsibility of the appropriate IRO
* Cases where there is a continuing self employment source and IB can be covered by personal allowances