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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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PAYE operation: employment and support allowance: coding

Automatically calculated ESA

The PAYE Service will automatically determine the tax code to be operated against the ESA claim and will issue the P6U to the Department for Work and Pensions (DWP). Where the ESA claim is a continuing primary PAYE interest the code will continue to be the code operated by the previous employer. Where the ESA is a secondary source and the ongoing primary is an occupational pension or retirement annuity the PAYE Service will include a restriction in the tax code for the total amount of ESA applied to the individual’s tax code for that year.

Where the tax code on the P45 Part 3 differs from the tax code on the record a work item (WI35) will be created so that the tax code can be reviewed.

The PAYE Service will be updated to allow calculation of the amounts of ESA for both CY and CY+1. The PAYE Service will determine if the claimant is liable to pay tax on their occupational pension / retirement annuity when ESA is taken into account and will apply the coding calculation below.

Where the individual is liable at Primary occupational pension / retirement annuity

  • CY - code ‘actual’ ESA and retain potential underpayment
  • CY+1 - code ‘annual’ ESA

Where the individual is not liable at Primary occupational pension / retirement annuity

  • CY - code ‘actual’ ESA without potential underpayment
  • CY+1 - code ‘annual’ ESA

Where the live primary source is an occupational pension or retirement annuity and the live secondary source is ESA, the PAYE Service will apply the ESA coding deduction to the live primary source tax code and allocate code BR or SBR to the live secondary source (no tax will be deducted by DWP).

The live primary source may exceed the personal allowance so no allowances will actually be due against the ESA source. The allocation of code BR to the ESA source will therefore ensure that, if the ESA claim ceases after the first 13 weeks and the live primary source utilises all of the personal allowances then an incorrect tax code has not been allocated to ESA and will not be carried forward to a new employer.

The existence of the secondary source and a deduction for ESA in the CY tax code will not result in either coding or end of year reconciliation accounting for the income source twice.

Note. Where the Scottish Rate of Income Tax is applicable it will include an S Prefix to the tax code, for example, S1100L, SBR or S0T. Further information is given at PAYE100035.

Manually calculating ESA - new claimants

There may be occasion when ESA needs to be manually coded. The calculated amounts of ESA for CY and CY+1 should be entered into IABD and the ‘Estimated’ ESA indicator set.

For new ESA claimants, calculate the amounts due as follows

  • CY weekly rate for 1st 13 weeks x 13 weeks (or the number of weeks left in the tax year if less than 13 weeks) + maximum individual weekly rate after 13 weeks x number of weeks to the end of the tax year
  • CY + 1 weekly rate x 52 except where the first 13 week period the 5 April (start of the new tax year)

Ensure a valid UBO office code is recorded in the ‘Works No’ field for the ESA employment record. A dash should be placed between the first two and the last three digits, in the format ‘nn-nnn’, for example 92-710.

Update Contact History to reflect the reason for manual update.

Linking rules

ESA has two linking rules

1. The short linking rule allows a customer to leave benefit for up to 12 weeks and return in the same position as when they left. For example, if a customer leaves ESA after six weeks and returns five weeks later they will only need to serve another seven weeks before entering the main phase.
   
2. The second linking rule allows a customer, after 13 weeks of a claim, to leave benefit for up to 104 weeks and return to the same benefit position as when they left. The rule applies only if the customer enters work or training. It also protects the benefit position of people entitled to the disability element of Working Tax Credit for up to two years.

When manually reviewing a tax code that contains ESA and Employment Summary shows more than 1 period of ESA during the tax year and the start date of the second period of ESA is within 12 weeks or 104 weeks of the start date of the first period of ESA, you should recalculate the ESA deduction based on the rules above.

Queries regarding ESA - standard lines

Any queries regarding entitlement to ESA benefit should be directed to Jobcentre Plus. Please also note standard lines to take as shown below.

ESA

‘You asked if you have to pay tax on your Employment and Support Allowance (ESA).

There are two types of ESA. If you have paid enough National Insurance contributions (NICs), you will get contribution-based ESA, which is taxable. If you don’t have enough money or you have not paid enough NICs, you will get income-related ESA, which is not taxable.’

IB to ESA reassessment

‘You asked if you have to pay tax on your Employment and Support Allowance (ESA).

ESA replaces both Severe Disablement Allowance, which isn’t taxable, and Incapacity Benefit (IB), which normally is. The exception to this is that if you received Invalidity Benefit before 1995 and have been getting Incapacity Benefit for the same illness ever since, you have not paid tax on this benefit.

If, as a result of reassessment, you move to contribution-based ESA, you may now have to pay tax. How much tax, if any, you have to pay depends on whether you receive any other income, for example, a pension.

This change means that, for the first time since 1995, everyone who gets a contribution-based benefit receives exactly the same treatment. It also reduces the complexity of both the benefits and tax systems. If, as a result of reassessment, you move to income-related ESA, this is not taxable.’

IB to ESA reassessment claims - coding

The initial 13 week rate does not apply to IB to ESA reassessment claimants.

In the year of reassessment, the weekly rate of ESA benefit paid to the individual will not be less than their previous weekly IB entitlement.

If an individual’s ESA entitlement is less than the amount of IB they were receiving prior to reassessment, they will receive a transitional addition to make up the shortfall. The additional allowance paid will be eroded over time at annual coding uprating.

Taxable IB to ESA

In the year of reassessment, where an individual has been transferred from taxable IB to ESA, the total of the apportioned coding deductions for IB and ESA will equal the previous coding deduction for the annual rate of IB.

Non-taxable IB to ESA

Where an individual has been transferred from non-taxable IB, Severe Disablement Allowance, or Income Support paid on the grounds of illness or disability to ESA, the coding deduction for ESA will be calculated automatically, therefore the deduction will include the initial 13 week rate.

If you receive any queries regarding the amount of ESA coded, you should follow the guidance below.

Queries regarding the amount of ESA coded

ESA rates can change depending on the individual’s circumstances.

Where you receive an enquiry regarding the amount of the deduction for ESA benefit included in an individual’s tax code, you should

  • Update IABD so that the correct amount of ESA is coded
  • Advise the individual that they must let you know if the rate of benefit changes, to avoid possible underpayment arising at the year end
  • Make a clear Contact History note that the ESA amount was amended at the request of the individual and they have been informed to contact us again if the rate of ESA benefit changes

Note: If ESA was coded following reassessment, the rate of ESA awarded will not be less than the rate of IB received prior to reassessment. Should the amount of IB and ESA be queried following reassessment, you must ensure that both benefit coding deductions in the tax code are accurate.

Any further enquiries regarding ESA policy should be addressed to

Public, Parliament and Stakeholders Division
Caxton House
Tothill Street
London
SW1H 9NA