Understanding the Disability Premium Compensation Scheme (Income Tax Exemption) Regulations 2025

The UK government is introducing new legislation to ensure that certain disability-related compensation payments are exempt from income tax, a move designed to support individuals transitioning from legacy benefits to universal credit. Here’s a breakdown of what this means and why it matters.

What’s the Legislation About?

This legislation exempts payments from income tax for those eligible under the Disability Premium Compensation Scheme. Essentially, if you were entitled to certain disability premiums or elements as part of your previous benefits, and you’ve transitioned to universal credit, the compensation you receive won’t be taxed.

Why This Change?

The High Court highlighted an unfair difference in how severe disability premium recipients were treated when moving from legacy benefits to universal credit. Some received additional financial support, while others didn’t. The UK government responded by introducing regulations to level the playing field, ensuring additional payments are made to those who missed out. These payments, for periods before 14 February 2024, need to be tax-free to ensure fairness.

The Legal Framework

The Finance Act 2020 allows the Treasury to declare certain government or public authority payments as exempt from income tax. This new regulation classifies Scheme payments as "qualifying payments," meaning they don't attract tax. Importantly, this exemption is retrospective from 18 December 2024, offering relief from the start.

Consultation and Impact

There was no formal public consultation, as the changes are straightforward and beneficial to taxpayers. The legislation doesn’t significantly affect businesses or the public sector financially or operationally.

Why It Matters

This move ensures that individuals receiving these compensation payments are not financially disadvantaged by tax liabilities. It’s part of the government's broader aim to support vulnerable individuals through fairer benefit transitions.

In summary, the Disability Premium Compensation Scheme (Income Tax Exemption) Regulations 2025 represents a thoughtful step towards equitable financial treatment for those moving from legacy benefits to universal credit, ensuring that they receive their due support without the burden of additional taxes.