Finance (No.2) Bill 2022-23: Taxation of new social security benefits

Clause 27 of the Finance (No.2) Bill 2022-23 will be debated on Wednesday 19 April 2023 in a Committee of the Whole House. It relates to the taxation of new social security benefits, or new top-ups to existing benefits. This is one of the selection of clauses of the Finance Bill that are going to be debated by the whole house, whilst the remaining clauses will be debated in a Public Bill Committee.

What are social security benefits?

Social security benefits are payments given by the UK Government and devolved administrations to support individuals and/or families. Usually, benefits that replace employment income are taxable, as employment income would be. Conversely, benefits that do not replace income from earnings are usually tax exempt.

Sections 660 and 677 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 (as amended) set out which benefits are subject to income tax, and which are exempt.

How are new benefits taxed?

When a new benefit is introduced by the UK Government or by a devolved administration, the UK Government has to amend ITEPA 2003 to clarify the tax treatment of that benefit. If the Government wants to establish that a benefit is exempt from income tax, it can amend ITEPA 2003 via a statutory instrument. This power was introduced in the Finance Act 2020.

However, if the Government wants to establish that a benefit is taxable, it currently can only amend ITEPA 2003 via primary legislation (PDF). This is because there is no law authorising the Government to use secondary legislation to amend the Act.

How does Clause 27 of the Finance (No.2) Bill 2022-23 amend this?

Clause 27 of the Finance (No.2) Bill 2022-23 would allow the Government to establish that a new social security benefit, or new top-up payment, introduced by a devolved administration is subject to income tax via a statutory instrument (rather than via primary legislation). This would allow the Government to establish the tax treatment of a benefit within a tax year.

When the power to clarify the tax exemption of a benefit via statutory instrument was introduced in 2020, it was not met with any significant commentary or opposition. At the time, the Chartered Institute of Taxation (CIOT) commented that they were surprised that that power did not exist already.