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HMRC internal manual

PAYE Manual

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PAYE operation: incapacity benefit: important points to note

It is essential that IABD is always fully updated with all income details for both CY and CY+1 so that the end of year reconciliation contains all of the customer’s income details. The tax code calculation will automatically remove any allowances and / or deductions which the DWP cannot use.

Important points to note about Incapacity Benefit are listed below by functional area. 

 

Annual Coding

You should refer to the Annual Coding Business Guidance Note (BGN) and / or Newsboard messages for the dates when the uprating takes place. See PAYE77020.

CY Coding

  • See PAYE77070 for information on the DWP modified PAYE scheme, remember DWP can only operate certain tax codes

Note: DWP cannot operate code BR against Incapacity Benefit claims.

  • A customer cannot receive both taxable Incapacity Benefit and State Retirement Pension (NIB) at the same. The only time when both Incapacity Benefit and State Retirement Pension should be coded in the same tax year is in first year State Pension cases. Incapacity Benefit will finish the week before the State Retirement Pension begins, this would normally be CY. IABD for CY+1 must be updated to remove the Incapacity Benefit deduction 
  • Do not issue previous pay and tax details to the DWP office. Incapacity Benefit is treated differently to JSA and DWP are unable to calculate any tax refund either when the Incapacity Benefit claim ceases or at the end of the tax year, see PAYE77070 
  • If the ‘start’ tax code in operation is the same as the tax code calculated, you should not send a duplicate P6 to the DWP office
  • The only time ‘Code NT’ should be issued through the PAYE Service, is where the individuals address is abroad / outside the UK. If you are coding out Incapacity Benefit, you should issue the DWP stencil held on Office Clerical Assistant (OCA)

Note: The only two documents that should be sent to the DWP office are either a tax code (P6) allowable under the modified PAYE scheme, see PAYE77070 or the DWP stencil held on OCA.

CY+1 Coding

  • If Incapacity Benefit is continuing you must always ensure that you update CY+1 IABD with 52 weeks of the weekly rate received however, make no attempt to anticipate future changes in the rate of benefit before 5 April
  • If Incapacity Benefit has ceased CY you must ensure that you update CY+1 IABD to remove (‘0’) the Incapacity Benefit figure
  • Incapacity Benefit and Employment and Support Allowance cannot be coded together in CY+1. Incapacity Benefit and Employment and Support Allowance can only be coded in the same tax year when Incapacity Benefit finishes and the new claim is Employment and Support Allowance, this would normally be in CY

Employment Maintenance

If Incapacity Benefit is being coded out for the first time at the primary source (as the primary employment / pension is continuing) a live secondary source employment (This content has been withheld because of exemptions in the Freedom of Information Act 2000)  must be set up in the employment summary screen. This ensures that the Incapacity Benefit forms P14 match correctly and Incapacity Benefit also stays in the CY+1 tax code at annual coding. See SPD 6a.19.

  • When Incapacity Benefit is the secondary source it will only be shown on the record in the employment summary screen

End of Year

  • A P14 is expected for each separate period of Incapacity Benefit claim within a tax year
  • The end of year reconciliation will only include the Incapacity Benefit amount(s) from the forms P14 posted to the record, it will not use any amount entered in IABD or the amount in the tax code

IABD

Where Incapacity Benefit is included in the tax code you need to set either the ‘actual’ or ‘estimated’ Incapacity Benefit indicator on the IABD screen to show whether the amount of the Incapacity Benefit included in the code is an actual or estimated amount. See PAYE77060.