Budget Notes

BN68 INCOME TAX EXEMPTIONS FOR THE RETURN TO WORK CREDIT, IN-WORK CREDIT, IN-WORK EMERGENCY DISCRETION FUND AND IN-WORK EMERGENCY FUND

Who is likely to be affected?

1. Recipients of payments made under the Return to Work Credit, the In-work Credit, the In-work Emergency Discretion Fund (in Great Britain) and the In-work Emergency Fund (in Northern Ireland) schemes.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to exempt from income tax, payments made under the following schemes, on and after 6 April 2008:

•    Return to Work Credit;

•    In-work Credit;

•    In-work Emergency Discretion Fund; and

•    In-work Emergency Fund.

3. Secondary legislation will be laid to introduce disregards for National Insurance Contributions (NICs) for these schemes.

4. The Return to Work and In-work Credit schemes have been run as pilot schemes by the Department for Work and Pensions (DWP) in Great Britain and the Department for Employment and Learning (DEL) in Northern Ireland. The pilot schemes have been in place since 1 October 2003 and 6 April 2004, respectively.

Operative date

5. The exemptions and disregards will have effect for payments made on and after 6 April 2008.

Current law and proposed revisions

6. Individuals are taxed on their earnings. Payments of Return to Work Credit, In-work Credit, In-work Emergency Discretion Fund and In-work Emergency Fund comprise earnings for the purposes of income tax within the meaning of section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and section 3(1) Social Security Contributions and Benefits Act 1992 for the purposes of NICs.

7. When the pilot schemes were launched, HM Treasury used their powers under section 151 of the Finance Act 1996 to exempt the current Return to Work Credit and In-work Credit pilot schemes from income tax. These exemptions only have effect for payments made under pilot schemes and so cannot have effect for payments made under the national schemes.

8. Section 677(1) of ITEPA includes, in Table B, the list of United Kingdom benefits which are exempt from income tax. Including the Return to Work Credit, In-work Credit, In-work Emergency Discretion Fund and In-work Emergency Fund in Table B will mean that payments made under the national schemes will be free from income tax.

9. Amendments will be made separately to the Social Security (Contributions) Regulations 2001 to disregard In-work Emergency Discretion Fund and In-work Emergency Fund payments for NICs.

10. Information about these schemes will be available on the DWP website at www.dwp.gov.uk and the DEL website at www.delni.gov.uk

Further advice

11. If you have any questions about the tax change, please contact Paul Thomas 020 7147 2479 (email: paul.thomas@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk