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Pension income - gross or net
It’s been a long day and now I’m confused! How does UC treat an occupational pension income for someone under pension age? CPAG page 130 says it is before deduction of tax but my QBC calculator program is taking it off net. In this particular case the gross pension would take this chap out of UC which would have a significant impact on how much he needs to contribute to a Disabled Facilities Grant from the local council. Please could someone clarify this for me? Thank you.
” All retirement pension income should be taken fully into account for UC; there are no comparable deductions for
Income Tax and NI in UC.”
1 UC Regs, reg 67; SPC Act 02, s 16(1) & 16(1)(za)
Retirement pension income
H5004 Retirement pension income includes RP, SP, occupational and personal pensions and certain other pension related income as explained at ADM H5005 et seq1. The meaning of “retirement pension income” has the same meaning as it does in SPC legislation but this does not mean that it is treated the same way when calculating UC. It also includes increases in RP for a person’s partner. All retirement pension income should be taken fully into account for UC; there are no comparable deductions for Income Tax and NI in UC. 1 UC Regs, reg 67; SPC Act 02, s 16(1) & 16(1)(za)
S&M states that there would be a strong argument to deduct the income tax, particularly where the tax has been deducted at source.
S&M states that there would be a strong argument to deduct the income tax, particularly where the tax has been deducted at source.
Yes, the specific discussion is at pages 428 and 429 of the 2023/24 edition of Vol.II, for anyone lucky enough to have access. The argument rests on the proposition that UC works on income that the claimant “has” (see the terms of the regulation-making power in para 4(3)(a) of Sch.1 to the Welfare Reform Act 2012 and the opening words of reg.66(1) of the UC Regs 2013 on unearned income) and that where an amount has been deducted from the gross amount of a payment due to the claimant by a legal process that the claimant cannot prevent operating (e.g. deduction of income tax at source from an occupational pension under PAYE) the claimant can only be said ever to have “had” the net amount. But that form of argument does not work if the claimant merely has a liability to pay income tax to HMRC (e.g. on self-employed earnings under self-assessment). And it can only be an argument because of the overall incoherence of the regs on unearned income.
Thank you all. This is all so helpful but what is S&M and how does that argument actually play out in the way that UC will process the claim?
Thank you all. This is all so helpful but what is S&M and how does that argument actually play out in the way that UC will process the claim?
Sweet and Maxwell, the big law books.
Thank you Paul. So would this mean UC would take the pension off gross and then we would need to request an MR of that decision using the argument in S&M? Would this likely take some time to be processed though and in the meantime the disabled facilities grant would have been awarded and my patient would be expected to pay his contribution? The grant is for a wash dry toilet so not something we want to delay applying for.
Thank you Paul. So would this mean UC would take the pension off gross and then we would need to request an MR of that decision using the argument in S&M? Would this likely take some time to be processed though and in the meantime the disabled facilities grant would have been awarded and my patient would be expected to pay his contribution? The grant is for a wash dry toilet so not something we want to delay applying for.
I don’t know in practice for sure but that would seem to be the case.
Your argument on MR would simply be that if your client’s pension is taxed at source, then the retirement provision that he “has” is the amount that is received, not the gross amount before tax is deducted.
If he is under self-assessment on the other hand, then he does have the gross amount and even though there might be income tax liable on it, he has the gross amount and that is what should be taken into account.
Being in receipt of UC does mean you’re not usually expected to contribute towards a DFG but I don’t know the position is your circumstances change whilst the process is on-going. Could your client apply for UC now, and make the argument above as part of that, and then instigate the DFG application process - if the UC was awarded at a later date but this covered the date of the DFG application, would you be able to argue that any contribution previously expected should be written off? Maybe one to check with the LA housing team?
My colleague has highlighted this to me. Has anyone flagged this up to Jon Blackwell or Lisson Grove? Could there be a facility where the ‘Tax on Occ Pension’ box is greyed out if ‘Calculate Universal Credit’ box is ticked?
My colleague has highlighted this to me. Has anyone flagged this up to Jon Blackwell or Lisson Grove? Could there be a facility where the ‘Tax on Occ Pension’ box is greyed out if ‘Calculate Universal Credit’ box is ticked?
Yes, we’re looking into the best way to handle this at the moment.
Thanks Paul, that’s really helpful.
Unfortunately, it’s a complicated one as the patient wouldn’t be entitled to UC with even net pension income until he moves in and has a rent liability (currently living with parents) but the Occupational Therapist has already instigated the DFG application process to ensure the gap without a wet and dry toilet is as short as possible. I will check with the LA Grants team about changes during the grant process.
OK, best of luck with that one.
Would it be worthwhile contacting Foundations who are the national body for DFG’s and Home Improvement Agencies to see whether they might be able to give any guidance or signpost to local support for this as well perhaps?
Would be interested to know how your client gets on in terms of both issues i.e. can you argue the net pension applies for UC and can backdating benefit entitlement passport someone to a place where they don’t need to contribute towards their DFG?
S&M states that there would be a strong argument to deduct the income tax, particularly where the tax has been deducted at source.
... where an amount has been deducted from the gross amount of a payment due to the claimant by a legal process that the claimant cannot prevent operating (e.g. deduction of income tax at source from an occupational pension under PAYE) the claimant can only be said ever to have “had” the net amount. But that form of argument does not work if the claimant merely has a liability to pay income tax to HMRC… And it can only be an argument because of the overall incoherence of the regs on unearned income.
Just joining in here late, most pension payments are made net, either as capital or income, as for tax purposes both are treated as taxable income within that tax year. This is one of the reasons that emergency tax is often applied to lump sum withdrawals, with sometimes unpleasant short term effects. On that basis, the argument for net use seems stronger. One question is what the practice of DWP is? Do they gross up declared net receipts, go to the provider for a gross figure or just use the net?
S&M points to “... there is nothing in the universal credit legislation, apart from the provisions on student income, to say how much of any payment of income is to be taken into account or positively providing any deductions or disregards. ...Similar questions can be raised about whether, where the type of unearned income concerned is subject to income tax, the amount of income tax due should be deducted in calculating the amount of income to be taken into account. That would apply to most kinds of retirement pension income, including state retirement pension… Surely then an argument can be made by analogy with the cases discussed above where the claimant cannot prevent an amount being paid to some third party by virtue of a legal process, so that only the amount actually received by the claimant should be taken into account. The alternative would require the amount of universal credit to be reduced by income that was never available to the claimant as the result of a legal process, a result that is to be avoided if at all possible”
I’m not sure why S&M doesn’t refer to R(IB) 3/05 or R(U) 8/83 where the commissioner said “For these reasons I conclude that the decision-maker was correct in the way in which he calculated the abatement of the claimant’s incapacity benefit. I have reached this conclusion with a certain amount of regret. I can well see how the claimant reached the view that the amount that was “payable” to him was the amount that the pension fund were obliged to pay to him, rather than to the Inland Revenue. It is perhaps regrettable that Parliament did not make what I have found to be its intention clearer. The differences between the treatment of income in different parts of the social security legislation are also, to say the least, untidy. But I am unable to conclude that in section 30DD Parliament has departed from the “gross of tax” treatment that was laid down in R(U) 8/83.”
Without an UT decision directly to the point then it will remain arguable and there are a lot of decisions that could weigh in those arguments. (e.g. R(FC) 1/90, R(IS)4/05, R(FIS)4/85 (Hogg), R(FC)1/98, R(SB)15/84 etc.)
Finally, although not directly relevant, even though it is a tax on income decision, the last sentence of the last paragraph in R(CS)1/05 (cough, Commissioner Mesher) should apply “If this is not what the Agency thinks the law should be, then the answer is that the regulations need to express that policy intent clearly”.
[ Edited: 8 Feb 2024 at 12:47 pm by Gareth Morgan ]
All the decisions mentioned by Gareth might be relevant to producing a whizzo Rolls Royce definitive answer, that would be far beyond what could be contained in a post on this forum or in the notes in the Social Security Legislation books when the outcome is so uncertain. But there should be caution about applying decisions on one benefit and its specific legislation to another benefit and different legislation. So I don’t think that there is any sort of general social security principle that income is taken into account gross unless the legislation expressly provides for deduction of income tax or other items. So, nor do I think that the approach apparently taken in ADM H5004 (see #️⃣2 in this thread) works, i.e. that because the UC legislation does not have a provision equivalent to reg.17(10) of the SPC Regs (disregard from income of tax payable and NIC deductions), the amount of retirement pension income in reg.66(1)(a) of the UC Regs to be taken into account must be the amount before even deduction of income tax at source under PAYE. The primary focus should be on the proper meaning of the UC legislation.
On that proper meaning, an immediate stumbling block could be the terms of the current forms of reg.66(1)(a) and (b), referring respectively to retirement pension income and to listed social security benefits to which a person is entitled and then requiring only taking into account amounts after any adjustment under the overlapping benefits rules. That is fine for social security benefits under reg.66(1)(b), but using the concept of entitlement obviously points to taking the gross amount into account, thus needing the specific exception to take account of an adjustment to the amount payable under the overlapping benefits rules. Does the same apply to occupational pensions etc within the scope of reg.66(1)(a) because of the reference to being entitled, so it’s end of argument? I would say not necessarily, because until April 2018 reg.66(1)(a) just listed retirement pension income with a reference to reg.67. The amendment from April 2018 was presented in the Explanatory Memorandum to SI 2018/65 and to the Social Security Advisory Committee as simply extending the rule about the overlapping benefits adjustment to the state retirement pensions and other benefits included within retirement pension income. So if, prior to April 2018, the amount of an occupational pension etc falling within reg.66(1)(a) to be taken into account would have been net of any income tax deducted at source under PAYE, it would be arguable that the 2018 amendment should not be taken to have changed that despite the introduction of the word “entitled”. But it’s still rather iffy.
This is just the sort of issue that, if it had appeared in the early years of supplementary benefit or income support, would be quite likely to have been disposed of by a Commissioner’s decision, either knocking an argument against a DWP interpretation on the head or, if accepting it, leaving the opportunity for reversal or clarification in further regulations. But with so few UC cases getting to the stage of a UTAAC decision, one is forced to speculate.
By the way, R(CS) 1/05 was Commissioner Wikeley, not me, so I can’t take credit for his characteristically incisive turn of phrase.
By the way, R(CS) 1/05 was Commissioner Wikeley, not me, so I can’t take credit for his characteristically incisive turn of phrase.
My apologies I misread my table of decisions.
As to the issue, I’d like to distinguish R(U)8/83 but I’m not sure whether I can differentiate any of the terms enough.
R(U) 8/83
UNEMPLOYMENT BENEFIT
Abatement of benefit on account of occupational pension payments-Whether gross or net payment to be taken into account
The claimant, a local government officer, was made redundant from his employment at the age of 60 on 31.3.81. The following day he claimed unemployment benefit. From that day he was also in receipt of an occupational pension of £409.60 per month from which income tax was deducted at source. His claim for unemployment benefit was disallowed from 6.4.81 by the insurance officer whose decision on appeal was confirmed by the local tribunal. On appeal the claimant contended before the Commissioner that the unemployment benefit to which he would be otherwise entitled fell, in terms of section 5(1) of the Social Security (No. 2) Act, 1980, to be reduced by reference to the net weekly amount of his occupational pension after deduction of income tax and not by his gross weekly amount.
Held that the benefit fell to be reduced by reference to the gross weekly amount of occupational pension because:
1. the distinction drawn by section 5 between periodical payments of pension which fall to be made and those which are made is not a distinction between gross payments and payments made net of income tax but between those periodical payments to which a claimant is entitled under the terms of his occupational pension scheme and those which are paid for the week in question;
2. when the payer makes a payment and deducts tax when doing so, the payment made to the claimant in terms of section 5(1) is of the sum from which income tax is deducted, not of the net amount received by him. Such tax is deducted on behalf of the claimant whose income has been augmented by the gross amount (paragraph 8).
The best distinctions I have come up with re R(U) 8/83 are:
1. The relevant definition there of “payments by way of occupational pension” was in terms of periodical payments that fell to be made to the claimant out of the scheme, which was agreed to mean the gross amount or what the claimant was entitled to receive under the terms of the scheme. That was enough to decide that it was that amount that governed whether there was abatement of unemployment benefit once the Commissioner had decided that provisions relied on by the claimant were only about what elements of the payment were attributed to what week (at least I think that’s what he decided). So the Commissioner did not need to say what he did in para.8(1) about tax deducted being on behalf of the claimant and his income having been augmented by the gross amount of the pension. I don’t think that the headnote to the report (not part of the official decision) captures the importance of the terms of the definition to the Commissioner’s conclusion. So that statement may not have been necessary to the decision and, even if it was, should not be taken as a general principle unrelated to the specific legislative context.
2. I’m not sure that I follow all the reasoning in para.8(3), but there is a suggestion that it mattered that at the time unemployment benefit was taxable as well as the pension and that it might be different if the benefit was not taxable or if some element of double taxation was involved. Could it be said that there is an effective double taxation if, having incurred income tax on the occupational pension, the claimant also suffers a diminution of the amount of UC awarded (or denial of entitlement) by reference to the full amount of pension entitlement, not what is actually available for living expenses?
Others might disagree, if they have the time and the inclination to dig deeper into these obscure points, or come up with something much better.