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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employer-financed retirement benefits schemes: persons chargeable and residence rules

Section 394 ITEPA 2003

SI 536/2010 - The Taxation of Pension Schemes (Rates, etc) Order 2010

[Notice: the guidance on this page should be read with the notice at the top of EIM15015]

It is common for an employer-financed retirement benefits scheme to provide benefits for people other than an employee. The payment of a lump sum or pension to the surviving spouse of an employee who dies in service would be a typical example.

Where a ‘relevant benefit’ (see EIM15021) is paid out of an employer-financed retirement benefits scheme:

  • if the recipient is an individual, the benefit counts as employment income of that individual under Section 394(1) ITEPA 2003 (see EIM00512)
  • if the recipient is not an individual (for example, a company or club), the ‘responsible person’ is assessed to income tax under s.394(4) ITEPA 2003, at a rate of 40%, or such other rate as may be set by Treasury Order. SI 536/2010 increases this rate to 50% with effect from 6 April 2010. This rate changed to 45% from 6 April 2012 (s1(4) Finance Act 2012). See EIM15056 for the definition of ‘responsible person’ and EIM15020 for the definition of ‘employer-financed retirement benefits scheme’.

The residence rules found in Chapters 4 and 5 Part 2 ITEPA 2003 (see EIM40001) do not apply to a charge under Section 394 ITEPA 2003. That is because such a charge is classified as ‘specific employment income’ by Section 7(4) ITEPA 2003 and those Chapters are not applicable to such income (Section 6(3) ITEPA 2003). A charge arises where there is either a person or a source of income in the UK. However, if the recipient is not resident in the UK tax relief may be due under the terms of any Double Taxation Agreement between the UK and the country is which the recipient is resident.

For the year of assessment, see EIM15058.