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HMRC internal manual

Employment Income Manual

Termination payments and benefits: Section 401 ITEPA 2003: contributions to a pension scheme

Section 408 ITEPA 2003

Before 6 April 2006

As part of the arrangements on termination of an employment, employer and employee may reach an agreement that the employer:

  • makes a contribution into a tax-exempt pension scheme (see EIM13660), or
  • makes a contribution into an approved personal pension scheme (see EIM01570)

for the employee’s benefit. Normally this means an adjustment to the termination payment.

These payments are not charged under Section 401 ITEPA 2003 provided that CAR Pension Schemes Services confirms that they do not breach any approval rules.

From 6 April 2006

The same treatment applies to contributions paid to a registered pension scheme or an employer-financed retirement benefit scheme (see EIM13660).

Note that payments that qualify under these rules should not be treated as using up any of the £30,000 threshold available for that termination under EIM13505 and subsequent guidance. So if an employer makes a contribution of £30,000 satisfying the above conditions and there is also a payment within Section 401 ITEPA 2003 of a further £30,000, there will be no charge at all under Section 401 ITEPA 2003.

Section 408 ITEPA 2003 removes a charge under Section 401 ITEPA 2003; it cannot remove acharge under Section 62 ITEPA 2003 (see EIM00515). However, arrangements are usually made so that any entitlement to a termination payment that would fall within Section 62 ITEPA 2003 is lawfully waived before the special contribution is made (see EIM42750).

Before 6 April 2003, the exception given by Section 408 ITEPA 2003 was available in the same terms under Statement of Practice 2/1981.