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HMRC internal manual

PAYE Manual

PAYE operation: employment and support allowance: permitted work / continuing employment income

Permitted Work

In general if paid work is undertaken then ESA will cease. However there are some types of work that can be undertaken, Permitted Work, Voluntary Work and Test Trading, where ESA will continue to be paid.

Exceptionally where Permitted Work is undertaken the earnings received are taxable and do not affect the amount of ESA payable. The permitted work should remain as a secondary source if the ESA is already primary or the ESA has been coded out in the primary source tax code as the primary source is an occupational pension.

Permitted Work may be notified to HMRC by the customer, employer or the Department for Work and Pensions (DWP) (Form PW10). The Permitted Work earnings limit is set by the DWP and is updated in line with National Minimum Wage on 1 October each year.

Continuing employment income, employer reference not known

If an employer is not registered under a PAYE scheme because all of its employees are paid below the PAYE threshold and below the National Insurance Lower Earnings Limit, you should

  • Select IABD landing CY
  • Select form type ‘other form’
  • Enter date of form receipt
  • Select ‘Earnings’
  • Input apportioned pay as ‘Casual Earnings’ and [Save]
  • Repeat for CY+1 with 52 weeks pay as ‘Casual Earnings’ and [Save]
  • Make a Contact History note of the actions taken

Note: A deduction for these earnings will not be included in the tax code, however you should ensure the correct amounts are included in both CY and CY+1 as these earnings recorded in IABD will be included in any reconciliation calculated for the tax year.

You should also check whether current SA criteria is met, for example where the casual earnings exceed £2501, unless the individual remains clearly NNL. If the individual receiving benefits is also self-employed an SA record will be required.

More information about the SA criteria is in the Self Assessment Manual, business area ‘Records’ section ‘Set up taxpayer record’, at SAM100000 onwards.

Continuing employment income

ESA cannot be included in the tax code when the primary source is an employment. In cases where an individual still receives income from their employment, for example sick pay, you should

  • Change the employment source to ‘secondary’
  • Remove the ‘P’ ceased indicator
  • [Save]
  • Review the CY tax code for all sources and enter the ESA as the estimated pay figure against the ESA source (This content has been withheld because of exemptions in the Freedom of Information Act 2000) in IABD. You should consider allocating any balance of allowances to the secondary source(s) as necessary
  • Make a Contact History note of the actions taken

Note: Where the primary source is an occupational pension / retirement annuity, you should continue to code out the ESA as a deduction in the tax code. (See the guidance at PAYE77250).