The Disability Premium Compensation Scheme (Income Tax Exemption) Regulations 2025
These regulations exempt from income tax payments made under the Department for Work and Pensions' disability premium compensation scheme and its Northern Ireland equivalent.
The exemption retroactively covers payments received on or after December 18, 2024.
This action addresses a court ruling that highlighted unfair treatment of certain universal credit claimants who lost disability premiums when transitioning from legacy benefits.
Arguments For
Intended Benefit: Provides tax exemption for compensation payments to address past inequities faced by certain universal credit claimants who lost disability premiums upon transitioning from legacy benefits. This rectifies a situation deemed unfair by the courts.
Evidence Cited: The regulations cite the court case Queen (on the application of) TP and AR (TP and AR No. 3) ([2022] EWHC 123 Admin) which highlighted unequal treatment, and the subsequent amendments to Universal Credit regulations to mitigate the issue for future claims.
Implementation Method: The regulations specify that payments under the scheme are qualifying payments exempt from income tax, ensuring straightforward implementation for the tax authorities and payment recipients.
Legal/Historical Basis: The regulations are made under the powers granted by the Finance Act 2020, Schedule 15, enabling the Treasury to specify qualifying payments for tax exemption with retrospective effect.
Arguments Against
Potential Impact: Could increase the overall tax burden on other taxpayers if funding is drawn from sources outside dedicated disability support programmes.
Implementation Challenges: Retrospective application might require significant administrative effort to identify affected claimants and adjust processed payments, leading to potential delays and disruptions.
Alternative Approaches: A direct payment adjustment via a separate support program may have resulted in greater transparency and a clearer separation from regular taxation processes.
Unintended Effects: May create unintended differences in treatment between claimants depending on the exact timing of their transition to universal credit and the complexities of eligibility criteria.
- Citation and commencement These Regulations may be cited as the Disability Premium Compensation Scheme (Income Tax Exemption) Regulations 2025 and come into force on 8th August 2025.
These regulations are officially titled the 'Disability Premium Compensation Scheme (Income Tax Exemption) Regulations 2025' and became effective on August 8, 2025.
- Exemption from income tax for disability premium compensation scheme payments (1) Payments made by the Department for Work and Pensions under the DWP disability premium compensation scheme2 and payments made by the Department for Communities in Northern Ireland under the corresponding scheme for Northern Ireland are qualifying payments for the purposes of paragraph 3 of Schedule 15 to the Finance Act 2020. (2) This regulation applies to payments received on or after 18th December 2024. (3) In this regulation “DWP disability premium compensation scheme” means the scheme created by the Department for Work and Pensions to compensate people who— (a) have been awarded universal credit, where the first day of the first assessment period in relation to that award fell before 14th February 2024, (b) have been awarded the universal credit transitional severe disability premium element, and (c) before they were awarded universal credit, were entitled to an award of one or more relevant legacy benefits that included a disability premium or element as specified in paragraph 4 of Schedule 3 to the Universal Credit (Transitional Provisions) Regulations 20143.
This section establishes the tax exemption.
Payments from the Department for Work and Pensions (DWP) and the equivalent Northern Ireland scheme qualify for income tax exemption under the Finance Act 2020.
The exemption applies to payments received from December 18, 2024 onwards.
The regulations define the DWP scheme as compensating individuals who received universal credit before February 14, 2024, received the universal credit transitional severe disability premium, and previously received legacy benefits with a disability premium or element.