Do benefits affect a tax refund?

A benefit from the government can affect a tax refund with the most important factor being if your state benefit is taxable or untaxable.

A state benefit is never taxed before you receive it however some benefits are classed as taxable income. If a benefit is taxable it will be added to your other income and taxed accordingly.

This means that if you are due a tax refund any taxable benefits will affect how much your tax refund will be because it increases your total income and how much income tax you need to pay.

What benefits are taxable?

Knowing what state benefits are taxable is useful because it lets you know whether you need to add your state benefit payments to other income when working out how much income tax you owe.

If you assume your benefit is not taxable and find out at a later date that this is incorrect this could result in you receiving a smaller than expected tax refund.

The most common taxable benefits include:

  • Your State Pension.
  • Jobseeker’s Allowance (JSA) that is contributions based or new style.
  • Carer’s Allowance.
  • Employment Support Allowance (ESA) that is contribution based.
  • Incapacity Benefit from the 29th week of receipt.
  • Bereavement Allowance.
  • Pensions paid by the Industrial Death Benefit scheme.
  • Widowed Parent’s Allowance.
  • Widow’s pension.

Many people know that a benefit like the state pension is taxable but other benefits like jobseekers allowance (JSA) are easily overlooked and the tax element misunderstood.

Not all JSA payments are taxable which means you need to know exactly what type of benefit you are getting and then check to see if it should be taxed.

Is JSA and ESA taxed?

JSA and ESA is not always taxed so checking with the DWP what type of JSA or ESA you are being paid is recommended.

If you are receiving taxable JSA or ESA at the end of a tax year you will be given a P60 by the DWP to detail how much benefit you were paid along with any other PAYE income and tax paid in that tax year.

Job seekers allowance

  • Contributions based or new style JSA is taxable.
  • Income related JSA which is means tested is not taxable.

Earning support allowance

  • Contributions based or new style ESA is taxable.
  • Income related which is means tested ESA is not taxable.

When you stop receiving JSA or ESA you will be receive a P45 from the DWP showing how much benefit you received in that tax year along with any other PAYE income and tax figures.

The P45 should be passed on to your next employer and you should keep your own copy just in case you need it in the future.

HMRC and the DWP have systems that are set up to share information so HMRC should automatically know about any taxable benefit income you receive.

What benefits are not taxable?

If your benefit is classed as non taxable it means they should not affect the value of your tax refund.

The most popular non taxable benefits include:

  • Job Seekers Allowance (JSA) which is income related.
  • Employment and Support Allowance (ESA) which is income related.
  • Income Support.
  • Universal Credit.
  • Working Tax Credit.
  • Child Benefit depending on your income.
  • Child Tax Credit.
  • Housing Benefit.
  • Disability Living Allowance.
  • Severe Disablement Allowance
  • Personal Independence Payment.
  • Guardian’s Allowance.
  • Attendance Allowance.
  • Pension Credit.
  • Winter Fuel Payments.
  • Lump sum bereavement payments.
  • Maternity Allowance.
  • Industrial Injuries Benefit.

How do I claim a tax refund when on benefits?

It’s not unusual for a tax refund to be due in a year in which you have worked and received benefits. This is normally because you have not worked for a complete tax year but taxed as if you have.

In theory if you are due a tax refund in these circumstances it should be automatically refunded by HMRC (the tax office).

If you haven’t received a tax refund and think you should have you should contact HMRC directly so they can check your record taking into account any taxable benefits and other income under PAYE.

Tax free personal allowances

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