How does employment and support allowance interact with tax?
Answered 17 March 2026
Here is a comprehensive answer on how Employment and Support Allowance (ESA) interacts with tax.
What the law says
Which ESA is taxable
Only contributory ESA is chargeable to income tax. Under ITEPA 2003, s.661, "contributory employment and support allowance" is listed as a taxable benefit in Table A, and the amount charged to tax is the full amount of the benefit accruing in the tax year, irrespective of when it is actually paid. The charge arises under Chapter 2 of Part 10 of ITEPA (tax on social security income).
Income-related ESA is not listed as a taxable benefit and is therefore not subject to income tax.
PAYE framework for ESA
The Income Tax (Pay As You Earn) (Amendment) (No.2) Regulations 2008 inserted Chapter 5 into Part 8 of the PAYE Regulations, bringing taxable ESA within a modified PAYE system administered by the Department for Work and Pensions (DWP). "Taxable employment and support allowance" is defined as any amount of ESA chargeable to income tax under Chapter 2 of Part 10 of ITEPA.
Key procedural obligations under the PAYE Regulations include:
- End of year: Where an award continues beyond the end of a tax year, DWP must (before 1 June following the tax year) make a tax calculation and issue a certificate to the claimant showing total ESA paid, the taxable portion, the claimant's code, NI number, tax deducted, and any tax refunded.
- Annual return: DWP must deliver a return to HMRC before 1 June following the end of the tax year.
- When an award ceases: DWP must make a tax calculation; the award ceases on the last day for which benefit was paid and was not recoverable.
- Recording: DWP must record the taxable ESA included in every payment made.
- Finance: HMRC must advance monies to the National Funds for use in making income tax repayments, and DWP must provide HMRC with a quarterly statement of receipts and payments.
HMRC guidance / practice
The two types of ESA and their tax treatment
HMRC's standard guidance explains the distinction clearly:
"There are two types of ESA. If you have paid enough National Insurance contributions (NICs), you will get contribution-based ESA, which is taxable. If you don't have enough money or you have not paid enough NICs, you will get income-related ESA, which is not taxable."
- Contribution-based ESA (ESA(C)): Introduced in October 2008, replacing Incapacity Benefit. It is chargeable to tax as social security income and is paid by DWP subject to a modified PAYE system.
- Income-related ESA (ESA(IR)): Also introduced in 2008 for those who do not qualify for ESA(C). It is not taxable.
- New Style ESA (from 2013): Contribution-based ESA was replaced with "New Style ESA", which is taxable. Income-related ESA was consolidated into Universal Credit, which is not taxable.
How PAYE operates in practice
DWP operates a modified form of PAYE on ESA. Crucially, ESA is paid without deduction of tax at source. DWP will calculate and make a repayment of tax if one is due, either at the end of the ESA claim or at the following 5 April if the claim is still live.
When a claim starts, Job Centre Plus asks for Parts 2 and 3 of the claimant's P45. DWP uses the JSAPS system to notify HMRC electronically of the start of a claim (via a P45(3)SUBS or electronic TIS equivalent).
Coding
ESA is included as a deduction in the claimant's PAYE tax code (reducing their personal allowance to collect tax on the benefit). HMRC's systems uprate the ESA amount annually using DWP data or an agreed percentage. However:
- Where ESA is the "live" primary income source, no ESA deduction should be included in the primary source tax code.
- ESA can only be coded out in the primary source tax code when the primary source is an occupational pension.
- A customer cannot receive both taxable ESA and State Retirement Pension at the same time (except in first-year State Pension cases).
IB to ESA reassessment
For those reassessed from Incapacity Benefit to ESA, HMRC notes that moving to contribution-based ESA may mean paying tax for the first time (depending on total income), whereas moving to income-related ESA means the benefit remains non-taxable.
Citation sources
Contribution-based Employment and Support Allowance (ESA(C)) was introduced in 2008. To qualify for ESA(C) the recipient must have paid sufficient National Insurance contributions in specified tax years, known as Relevant Income Tax Years. ESA(C) is known as a contributory benefit because unless sufficient contributions have been paid there will be no entitlement. ESA(C) is chargeable to tax as social security income. It is paid by the DWP subject to a modified system of Pay As You Earn. From 20
Income Related ESA (ESA(IR)) was introduced in 2008. If a person satisfies the generic conditions for entitlement to ESA but is not entitled to received ESA(C) then they may be entitled to receive ESA(IR). ESA(IR) is not taxable. From 2013, income-related Employment and Support Allowance was consolidated (along with a number of other benefits) into a new payment called Universal Credit.
Where ESA is the ‘live’ primary source no ESA deduction should be included in the primary source tax code ESA can only be coded out in the primary source tax code when the primary source is an occupational pension / retirement annuity and the OCPN indicator is set on the employment record. ESA cannot be coded out where the primary source is an employment, in these cases you should follow the guidance at PAYE77260 When a new occupational pension is notified, the occupational pension source should
ount. Obligations at the end of the year 184I 1 This regulation applies in respect of each award which includes taxable employment and support allowance and which continues beyond the end of a tax year. 2 Before 1st June following the end of the tax year the Department must— a make a tax calculation in accordance with regulation 184N if the claimant’s code is used on the cumulative basis; and b subject to paragraph (3), issue a certificate to the claimant. 3 The Department need not issue a certi
‘You asked if you have to pay tax on your Employment and Support Allowance (ESA). There are two types of ESA. If you have paid enough National Insurance contributions (NICs), you will get contribution-based ESA, which is taxable. If you don’t have enough money or you have not paid enough NICs, you will get income-related ESA, which is not taxable.’
Part 10 Social security income Chapter 3 Taxable UK social security benefits Taxable social security income 661 1 This section applies in relation to each of the following taxable benefits listed in Table A— bereavement allowance, carer’s allowance, carer's allowance supplement, carer support payment, contributory employment and support allowance, incapacity benefit, ... income support. welfare supplementary payments payable pursuant to the loss of contributory employment and support allowance,
nd support allowance which is chargeable to income tax under Chapter 2 of Part 10 of ITEPA (tax on social security income). Application of other regulations 184B 1 The following regulations apply to payments of employment and support allowance made to a claimant with the modifications mentioned in paragraphs (2) to (5) — regulation 2 interpretation regulation 14 matters relevant to determination of code regulation 15 flat rate codes regulation 16 continued application of employee’s code regulati
‘You asked if you have to pay tax on your Employment and Support Allowance (ESA). ESA replaces both Severe Disablement Allowance, which isn’t taxable, and Incapacity Benefit (IB), which normally is. The exception to this is that if you received Invalidity Benefit before 1995 and have been getting Incapacity Benefit for the same illness ever since, you have not paid tax on this benefit. If, as a result of reassessment, you move to contribution-based ESA, you may now have to pay tax. How much tax,
; and b subject to paragraph (3), issue a certificate to the claimant. 3 The Department need not issue a certificate if— a no taxable employment and support allowance has been paid, and b a tax calculation in accordance with regulation 184N is not required. 4 The certificate must show— a the tax year to which it relates, b the total employment and support allowance for the tax year excluding any amounts previously notified under regulations 184L(4) and 184Q(2)(a), c the taxable employment and su
culations 184P 1 This regulation applies if, in respect of a claimant, the Department receives notification from HMRC of— a a code or amended code, b total payments to date, or c total net tax deducted. 2 The Department must record that notification in substitution for any previous record and use it for the purpose of all calculations required under this Chapter. Notification of taxable employment and support allowance 184Q 1 Paragraph (2) applies if— a after a certificate under regulation 184I(
From 2013, a number of social security benefits have been consolidated into a new payment called Universal Credit. Those benefits include income-based Employment and Support Allowance, income-based Jobseeker’s Allowance and Income Support. Universal Credit is not taxable. Contribution-based Jobseeker’s Allowance and contribution-based Employment and Support Allowance have been replaced with New Style Jobseeker’s Allowance and New Style Employment and Support Allowance respectively. New Style Job
The Department for Work and Pensions (DWP) will operate a modified form of PAYE on Employment and Support Allowance (ESA), which will be paid without deduction of tax. DWP will calculate and make a repayment of tax, if one is due, at the end of the ESA claim or at the following 5 April if the claim is still live. When someone makes a claim for ESA, Job Centre Plus will ask them for Parts 2 and 3 of form P45 given to them by any previous employer. Where the claimant produces form P45, the details
Part 10 Social security income Chapter 2 Tax on social security income Amount charged to tax 658 1 The amount of social security income which is charged to tax under this Part for a particular tax year is as follows. 2 In relation to a taxable benefit, the amount charged to tax is the net taxable social security income for the tax year. 3 The net taxable social security income for a taxable benefit for a tax year is given by the formula— TSSI - PGD where— TSSI means the amount of taxable social
This process is carried out each year with the Annual Coding - Main Review or as a separate process after the main review. Where state pension / benefits or employment and support allowance or incapacity benefit is included as a deduction in the individual's CY+1 coding record, it updates the amount of state pension / benefits or employment and support allowance or incapacity benefit for CY+1 in accordance with the pension / benefit details on the DWP file. Where details are not available on the
Citation and commencement 1 These Regulations may be cited as the Income Tax (Pay As You Earn) (Amendment) (No.2) Regulations 2008 and shall come into force on 27th October 2008. Amendment of the Income Tax (Pay As You Earn) Regulations 2003 2 The Income Tax (Pay As You Earn) Regulations are amended as follows. 3 In Part 8 (Social Security Benefits), after Chapter 4 (Income Support) insert— CHAPTER 5 EMPLOYMENT AND SUPPORT ALLOWANCE Interpretation of Chapter 5 184A In this Chapter— “award” means