Tax on ex gratia payments

This really a tax liability question, but I think it depends on the benefit situation. There is more background at http://www.rightsnet.org.uk/forums/viewthread/179/

Basically, some error led to my client missing out on 5 years of state pension increase between age 65 and 70, though she got the increase going forward. We went to tribunal, judge said it was not in his powers to revise a 5 year old decision when no such decision had been made. However, he did make a finding that the client had correctly made her original SRP application 10 years ago, and was not at fault.

We put all this in a financial redress / maladministration complaint, and have eventually got payment of the missing benefit, ca £4K. My question is, how should this be taxed?

Ex gratia payments connected with benefit are usually treated as if they were benefit (at least for tax credits, so I assume for income tax?). However, as I understand it SRP is treated as pension income, not social security income, but I don’t what the this means in practice.

I have never succeeded in such a complaint before, and was expecting any money to be in the form of an extra-statutory payment. However, she has received a standard SRP award letter, describing the weekly amount of SRP from 2005 onwards, showing the annual increases, and saying the £4K owing since 2005 will be paid into her account. There is nothing there to indicate this is anything other than arrears of benefit. She has other taxable income, so if this is actual benefit I assume HMRC will go back and increase income tax for the last 5 years.

Should compensation be paid like this, in what looks like an any-time revision? For tax, is this payment a lump sum in the current year, or is it income over 5 years?

Good point, though “just ask the DWP” isn’t always a satisfactory answer to a benefit query ;).

I guess my concern is that this looks like a benefit income on paper, and so will probably be treated as such by HMRC. But, I’m not sure if it it actually is benefit - and if it isn’t, perhaps it should be treated differently?

This will be reported to the taxman anyway, but I would quite like to give some advice on if it is worth an accompanying explanation of how it arose. State and occ pens already put her into tax btw.

And, do I need to make further enquiries from the pension service about what exactly this payment is.

Hi.  If you want some impartial advice you could try asking TOP (Tax Help For Older People).  Tel no. 0845 601 3321

Thanks Jayne for the suggestion.  I had tried to get through to them on the phone, and sent them an email. We’ve found them helpful in the past, I expect they will be able to tell me if I’m overthinking this or not.

Or Taxaid or the Low Incomes Tax Reform Group?

TaxAid came to the London Advice Forum yesterday and gave us a presentation on their work.

Their public helpline number is 0345 120 3779, weekdays between 10am and 12pm or visit their website http://www.taxaid.org.uk

They did say that they can take direct referrals sometimes from agencies, but I don’t have those details to hand presently, if I can find out more, I’ll get back to you.

TaxAid have replied now and say that advisers are welcome to call them directly on our office admin number (it doubles as the Advisers Helpline number) which is 020 7803 4950. Advisers can call with their clients with them or not but it’s often easier if the client is available to answer their questions.

If they have an adviser free (they normally do) they’ll put the call straight through. If not, they aim to call back asap. That number works Mon-Fri, 9-5pm (whereas the public helpline is just 10-12noon).

Thanks again for the suggestions.

As it turns out, and despite us losing at tribunal when going for arrears of pension, it turns out that the payment I had thought must be a compensation payment actually is designated as arrears of state pension, paid out on grounds of official error. So I suppose the tax treatment should just be the standard one for arrears of a pension.