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HMRC internal manual

Employment Income Manual

Employer-financed retirement benefits schemes: tax charges


The guidance in this section (from EIM15015 to EIM15399) about receipts from an employer-financed retirement benefits scheme (EFRBS) only applies from 6 April 2006.

As regards income or benefits being provided through third-party arrangements (such as funded EFRBS) after 5 April 2011, the guidance must be read together with that on income provided through third-parties (as explained in EIM15010).

If dealing with a receipt before 6 April 2006, proceed in accordance with the guidance for receipts from a non-approved retirement benefits scheme in the section from EIM15400 onwards.

Sections 394(1) and (2) ITEPA 2003

A charge to Income Tax arises through section 394(1) or (2) whenever a relevant benefit is received from an employer-financed retirement benefits scheme (EFRBS – as defined in EIM15020) on or after 6 April 2006. EIM15055 explains about who pays the charge and how much. This is subject to the exceptions or reductions outlined below.

The significance of relevant benefits for the s394 charge

The most common type of relevant benefit provided by an EFRBS that can be charged under section 394 is a lump sum payment, but the actual definition is wider. If a benefit is not a relevant benefit, then it cannot be charged under section 394. For this reason it’s important to determine whether a benefit is, or is not, a relevant benefit.

EIM15021 explains more about relevant benefits and gives a list of exceptions. The exceptions are in legislation and consist of things that in character would be relevant benefits if not specifically carved out. An example of such an exception is pension income charged to tax under Part 9 ITEPA 2003 (see EIM74000 and subsequent guidance). Pension income charged to tax under Part 9 ITEPA 2003 is prevented from being a relevant benefit (by section 393B(2)(a)), because otherwise it would have the character of a relevant benefit.

Other ways of turning off or limiting the s394 charge

There are times when benefits meet the definition of relevant benefits in EIM15021, but still escape some or all of a section 394 charge. This is when any of the following apply:

  • ‘transitional’ rules recognise taxed employer contributions paid into the scheme before 6 April 2006 (whether or not there are such contributions on or after that date) and take them out of the Section 394 charge: see EIM15121
  • contributions paid in by the employee (typically out of already taxed income) may need to be taken out of account: see EIM15126.
  • if the total amount of the benefits received by an individual from an EFRBS in a tax year is £100 or less, there is no charge (section 394(1A) ITEPA 2003). If the total exceeds that sum, then it is all charged (that is, not just the excess over £100).
  • the charge under section 394 only applies to the amount of the benefit so far as it exceeds ‘other relevant income’. This is because ‘other relevant income’ is any part (or whole) of the benefit which is:
  1. general earnings of the employee (or former employee) chargeable to Income Tax
  2. employment income of the employee (or former employee) which counts or counted under Chapter 2 of Part 7A (see EIM45705 on employment income and EIM15010 on how this arises under third-party EFRBS), or
  3. an amount which would be within (a) or (b) above, apart from the employee or former employee having been non-UK resident for any tax year (for example due to section 554Z4 ITEPA 2003 – see EIM45720).

Effectively, taking ‘other relevant income’ out of section 394 charges prevents double charging or charging where charges are not appropriate. Most commonly one would expect to see funded EFRBS already subject to charges under Part 7A coming within (b) above.

Finality – section 394(5) and (6)

Once a relevant benefit has been tested under the EFRBS rules and possibly charged under section 394(1) or (2), then there can be no further liability to Income Tax on that benefit. This is not to say that it negates any charge on general earnings, or through Part 7A, as those charges will have taken priority over section 394.