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HMRC internal manual

Employment Income Manual

Employment income: earnings are not taxable unless they are from the employment

Section 7(3) and Section 62 ITEPA 2003

The guidance on this page relates solely to earnings within Section 62 ITEPA 2003 (see EIM00515).  Different rules apply to amounts that are treated as earnings under the benefits code (see EIM20005 onwards).

An employee may receive something that is clearly a ‘profit’ to them and which is therefore capable of being earnings. For example, most money payments are, potentially, earnings. But a payment will not count as earnings under Section 7(3) and Section 62 ITEPA 2003 if it comes to the employee from a source other than the employment. The fact that the employer or ex-employer paid it is not conclusive that it is taxable as earnings.

For example, a wedding gift from an employer to an employee would not normally be taxed as earnings under Section 62. Looking at it from the employee’s point of view they do not receive it by virtue of being an employee but because of an event unconnected with their employment - their marriage.

Section 19(1)1 ICTA 1988 referred to taxable emoluments, or earnings, as “emoluments therefrom”. That is, emoluments that come from the employment and not from elsewhere. Section 62(2) ITEPA 2003 refers to earnings as “anything that constitutes an emolument of the employment”. The words have changed, but not their meaning. So we can still use the case law relating to Section 19 ICTA 1988 (and its statutory predecessors) to help us decide if a particular payment is or is not earnings within Section 62(2) ITEPA 2003.

In Laidler v Perry (42TC351), Lord Reid put succinctly the question that has to be answered in all cases:

“Did this profit arise from the employment? The answer will be no if it arose from something else.” (42TC363).

Judges have tried to explain the meaning of the words ‘from the employment’ in various ways. As Lord Radcliffe pointed out in Hochstrasser v Mayes (38TC707) their attempts help to illustrate the idea expressed in the words of the statute but they do not replace those words. He went on to say:

“For my part I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.”

In Shilton v Wilmshurst (64TC78), Lord Templeman explained the statutory words in this way.

 ”An emolument ‘from employment’ means an emolument ‘from being or becoming an employee.’ The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived ‘from being or becoming an employee’ on the one hand, and an emolument which is attributable to something else on the other hand.’’

Note that to be taxable as earnings a payment does not have to be remuneration or areward for services (see EIM00610). Many other types of payment fall within the statutory definition of earnings.

See also:

  • important principles (see EIM00610)
  • lump sums taxable as earnings (see EIM00620)
  • list of particular items (see EIM01000)