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HMRC internal manual

Employment Income Manual

Termination payments and benefits: Section 401 ITEPA 2003: exceptions: lump sums from certain pension schemes

Section 407 ITEPA 2003 excepts, for the purposes of Section 401 ITEPA 2003, a lump sum or other benefit from a tax-exempt pension scheme if:

  • the lump sum or other benefit is paid in compensation for loss of employment or loss or diminution of earnings and the loss or diminution is due to ill-health, or
  • the lump sum or other benefit is properly regarded as earned by past service (essentially it is part of the individual’s retirement benefits)


  • This guidance applies only for tax exempt pension schemes (see below) A lump sum or other benefit from any other pension scheme should be considered under Section 394 ITEPA 2003 (see EIM15010 and subsequent guidance).
  • This guidance only applies to lump sums or other (non-cash) benefits. A pension is taxable as pension (see EIM74001).


  • Definition of tax-exempt pension scheme (Section 407(2) ITEPA 2003)

    For this purpose tax exempt pension scheme means a retirement benefits scheme (see EIM15020) which is either 

    a registered pension scheme (or before 6 April 2006 an approved scheme or a relevant statutory scheme, that is a scheme for which the particulars are set out in statute or regulations or which has been approved by a Minister or Government Department - examples are the Civil Service and Local Authority Schemes), or

    a scheme set up by a non-UK government primarily for its employees, or

  • a scheme described in Section 221 or (2) ICTA 1970 (these are now uncommon and CAS Pension Schemes Services are responsible for them).