- A number of local authorities have indicated their intent, subject to the availability of resources, to provide discretionary payments to low-income parents who have an offer of employment. The purpose of payments is to help tackle financial insecurity for parents when they start work by providing support to meet their priorities.
- To support local policy development, the Scottish Government engaged with HMRC and DWP, on behalf of local authorities, to seek guidance on how such payments would be treated under reserved tax and benefit rules.
- HMRC advised that, under regulations at that time (November 2023), such payments would be taxable as income and would be considered to be earnings for the purposes of Class 1 (employee and employer) NICs. In addition, the PAYE rules (regulation 12) mean that the local authority would be the ‘other payer’ and so would need to set up a PAYE system and be responsible for deducting income tax and NICs on the payments. Payments would be considered income for tax credits and individuals receiving payments wouldn’t then be eligible for tax-free childcare.
- In recognition of the positive impact payments may have on individuals, Treasury Ministers agreed to introduce regulations to formally exempt payments from tax and national insurance from 1 April 2024 onward. Payments made before this date will be subject to regulations in place at that time.
- Local authorities must meet the cost of payments from available resources. Where funds have been allocated for a specific purpose, local authorities must ensure compliance with any relevant terms. No One Left Behind funding cannot be utilised for payments of this nature.
- This guidance covers payments made under the scheme.
- Parents are eligible for payments, at local discretion, if they meet the following criteria:
- engaging in local employability services.
- are in receipt of social security benefits on the basis of low income, or as a result of disability.
- have a formal offer to start work.
- their circumstances are assessed as appropriate by practitioners.
- Parents may be eligible for local employability support services if they are at risk of long-term unemployment or are in work and have low earned income.
- A ‘parent’ is defined as any individual who is responsible for a dependent child, or the partner of an individual responsible for a dependent child.
- It is unlikely that repeat awards linked to employment will occur in a rolling year. Subsequent awards may be made at local discretion.
- Payments should be made by local authorities, with the method and timing of the payment agreed with the individual.
- Local authorities have discretion over the method used to make payments to households. It is recognised that, in most cases, payments will be made as a direct payment into the individuals bank account. Where an individual has expressed preference for an alternate payee, this should be considered on a case-by-case basis.
- Alternative payment methods should be considered as appropriate and in agreement with the individual. This could include, for example, a gift card or voucher to the individual, a payment to an organisation delivering a service, or the purchase of an item on an individual’s behalf / allocation of item(s) from existing stocks, for example, a bike / travel card.
- Local authorities have discretion in whether any payment is given at one time or split over a number of payments. HMRC considered proposals on the basis that payments may be split and paid in instalments over a short period, accounting for no more than 3 months, to suit requirements of the individual. Payments over a period longer than 3 months are not covered by this guidance and may require additional consideration by HMRC.
- Local authorities have discretion over the cumulative value of payments / awards to be provided to an individual in any given period. HMRC considered proposals on the basis that payments did not exceed £1,000 in any given year. Payments considerably more than this value are not covered by the guidance and may require additional consideration by HMRC.
Treatment for tax and benefit purposes
- From April 2024 onward, payments made in line with this guidance are non-taxable. Recipients do not need to inform HMRC of the amounts received and those who are self-employed do not need to report the amounts on their Self Assessment tax returns. As these payments are non-taxable they do not impact tax credits. Tax credits claimants do not need to report these payments as income to HMRC.
- DWP have considered the purpose of such payments against the definition of ‘local welfare provision’ in relevant legislation. On that basis, DWP have indicated that payments would be disregarded for the purpose of those benefit entitlements for which the legislation specifies that capital to be disregarded includes ‘any local welfare provision.’  DWP have also indicated that the payments would have no impact on particular contribution-based benefits.
- DWP have indicated that payments will be treated as capital for the purpose of Universal Credit and may impact upon entitlement where the total capital held exceeds £6,000, either prior to or as a result of this payment. Further information on the treatment of capital for the purpose of Universal Credit can be found on the understanding Universal Credit website.
- DWP have noted that current legislation will not allow for the childcare costs element of Universal Credit to provide support where the childcare costs have already been paid elsewhere. Payments made by Jobcentre Plus Work Coaches, through the Flexible Support Fund, are exempt from tax and can be reimbursed through Universal Credit.
- Local HMRC Customer Compliance Managers will be able to provide further advice in relation to tax and national insurance.
Monitoring and reporting
- No additional reporting requirements have been agreed because of this guidance. It is encouraged to continue reporting details of awards through existing mechanisms, including annual Local Child Poverty Action Reports.
- Local authorities should maintain appropriate records of all payments made under this scheme.
 “local welfare provision” means occasional financial or other assistance given by a local authority, the Scottish Ministers or the Welsh Ministers, or a person authorised to exercise any function of, or provide a service to, them, to or in respect of individuals for the purpose of:
- meeting, or helping to meet, an immediate short term need
(i) arising out of an exceptional event, or exceptional circumstances; and
(ii) that requires to be met in order to avoid a risk to the well-being of an individual; or
- enabling individuals to establish or maintain a settled home, where those individuals have been or, without the assistance, might otherwise be
(i) in prison, hospital, a residential care establishment or other institution; or
(ii) homeless or otherwise living an unsettled way of life;
 Regulation 2(1) of the Income Support (General) Regulations 1987, regulation 1(3) of the Jobseeker’s Allowance Regulations 1996, regulation 2(1) of the Employment and Support Regulations 2008, regulation 2(1) of the Housing Benefit Regulations 2006, regulation 2(1) of the Housing Benefit (Persons who have attained the qualifying age for state pension credit) Regulations 2006 and regulation 1(2) of the State Pension Credit Regulations 2002.
 Income-related Employment and Support Allowance, Housing Benefit, Income Support, Income-based Jobseeker’s Allowance, and State Pension Credit.
 New Style Jobseeker’s Allowance and New Style Employment and Support Allowance.
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