Bereavement Benefits (Remedial) Order 2022

Lord Davies of Brixton Excerpts

Tuesday 17th January 2023 Grand Committee

[Baroness Altmann (Con)]

My Lords, I too very much welcome this order. I am most grateful to my noble friend the Minister for his excellent introduction and explanation.

Enabling co-habiting bereaved partners to be treated the same way as those who are legally married in claiming the widowed parent’s allowance or bereavement support payments is something for which I think there is unanimous support. Indeed, I have found it extraordinarily difficult to justify denying these payments to cohabiting couples in the past when, in other tax and benefit calculations, there is no differentiation in this way; often, that can be to their financial detriment. This order is most welcome.

Echoing the words of the noble Baroness, Lady Hayman, I pay tribute to my noble friend Lady Stedman-Scott and welcome my noble friend Lord Younger to his position. I am most grateful to the Low Incomes Tax Reform Group for its briefing and the work it has been doing on this change and want to raise a few issues relating to the potential tax and benefit consequences of surviving partners receiving backdated lump-sum payments pursuant to this order. If the Minister does not have the answers today, I am happy for him to write to me.

The first issue relates specifically to the widowed parent’s allowance, as this benefit is taxable, unlike bereavement support payments. Lump-sum back payments could well give rise to tax demands for the recipients, when they are applied to past tax years for which they were due. In many cases, recipients are unlikely to have a tax adviser to help them look back over past years. They may have spent the money and, as a consequence of this order, face sudden tax demands and penalties for which they are unprepared. The documents accompanying this order state that the DWP will flag cases to HMRC, but how will this work in practice? Could it give rise to a potential problem for the claimants which, after all the years they have been waiting for this money, seems to be something to be avoided—if we can?

Paying the lump sums gross runs the risk of the money being spent. What measures can the Government implement in practice to protect claimants? Could my noble friend tell us, for example, how the DWP might work with the Treasury to jointly identify those who may be affected, perhaps by using national insurance numbers to link up records, and help people to understand how much tax they need to pay? The JCHR recommends that recipients should be clearly reminded, but might my noble friend consider going further and, perhaps, more proactively involving MoneyHelper or some other direct communication that clearly warns that tax may be due on this money, so that it does not come as a surprise?

The second issue relates to recipients of back payments who are on means-tested benefits. I welcome my noble friend’s confirmation that the lump sums resulting from this order will indeed be disregarded, but I hope he can also reassure us on a point that has been raised—it may already have been catered for—about whether, as I hope, there is a sensitive interpretation of the deliberate deprivation of capital rules. People who suddenly have a change in lifestyle because they have received a lump sum that they should have had over a period should not then be considered as deliberately depriving themselves of capital or should not lose out in some other way.

How will backdated lump-sum awards be treated for tax credits? I thought I heard my noble friend say that these are disregarded for universal credit and means-tested benefits, but is that the same for tax credits? I suspect it is not, from listening to my noble friend. It seems wholly unfair for the DWP to treat the payments as capital and disregard the income, other than that relating to the current year, when HMRC treats them as income in that year for the purpose of tax credits.

I know that tax credit legislation is complicated, and it refers to the amount of widowed parent’s allowance being payable. That may be what is driving some of this, but as this relates to past years, it was actually payable previously rather than being—one could argue—payable today. It seems like a grey area. I wonder if the Government might consider building a specific income disregard into regulations if the current position cannot be remedied.

Finally, I echo the comments of the noble Baroness, Lady Hayman, on the importance of reaching out to potential claimants, particularly as there is a time limit, to ensure that people know that they can claim and come forward with their claims. This could be through some national advertising campaign, or maybe the Government already have a database with some indication of cohabiting couples or past claimants who were turned down who can be contacted. Overall, I very much welcome this order and thank my noble friend for his introduction.

[Lord Davies of Brixton (Lab)]

My Lords, I thank the noble Viscount for his useful introduction and give a more general welcome; I suspect that we will be endlessly discussing a series of regulations over the coming months. I thank the noble Baroness, Lady Hayman, for reminding us that there are people involved here. It is easy when you just have a printed set of regulations to think it is just shuffling paper, but there are real people out there who will benefit from these changes. Clearly, we have to welcome that.

Part of the problem is—I take the points raised by the noble Baroness—the mechanics of how this is operated: not what is set out in the regulations but how it will be applied in practice by the officials involved. It should be done as sensitively and practically as possible. I am particularly interested in taxation and how tax is applied to these payments. This is a particular problem which is going to get bigger, and we will be discussing it again. It is a result of the fact that, for all intents and purposes, state benefits are outside the PAYE system.

The problem is that we know the personal allowance will be frozen for a number of years, at a time when inflation is at high levels. With benefits tied to inflation and a frozen personal allowance, more and more pensioners are going to be dragged into the PAYE system on relatively limited amounts of non-state pension income, which will have to be used to pay the tax, potentially, on their state pension. Many people have state pensions in excess of the personal allowance given their credits under SERPS. I think this is going to be a growing problem. It is one I hope the DWP will be able to discuss with HMRC.

My personal situation is that I suffer from this. I have a pretty good state pension and I have to pay tax on quite a large slice of that income out of other income. I manage it because I have the resources to do so, but people on the margin are going to find it increasingly difficult. The example mentioned is one where the closest co-operation between DWP and HMRC is crucial. Politically, it would be advantageous to get the situation sorted, because it will lead to a lot of concern and debate.

My final point relates to the evidence requirements for cohabitation. Most rules applied in the social security sphere about cohabitation tend to be there to take away benefits rather than grant them. Will the department apply the same rules that it applies when it comes to means-tested benefits about cohabitation, or will there be a separate set of rules? If there is a separate set of rules, is there a possibility that it will work against the individual at both ends? To just put in the Explanatory Memorandum that the evidence requirements will be produced “in due course” rather misses the sharp end of this legislation. How it works in practice will depend on the evidence requirements, and it would be useful if we could be told a bit more about where the evidence requirements will fit as compared with other examples where cohabitation affects benefits of different sorts.