Employer-financed retirement benefits schemes: receipts excluded from charge: prior employer contributions made both before and on or after 6 April 2006
Paragraphs 53, 54(1) and (3)-(4) Schedule 36 FA 2004
[Notice: the guidance on this page should be read with the notice at the top of EIM15015]
This guidance applies only to receipts from a employer-financed retirement benefits scheme (see EIM15020) and so applies only on or after 6 April 2006.
If employer contributions were made only before 6 April 2006, see EIM15125.
If the employer made contributions both before 6 April 2006 and on or after that date and neither of the two options below apply see EIM15129.
A lump sum received after 5 April 2006 that is otherwise chargeable under Section 394 ITEPA 2003 (see EIM15010) is chargeable as follows where the employer has made contributions to the scheme both before and on or after 6 April 2006. Provided that the employee has been taxed on the employer contributions made before 6 April 2006 under Section 595 ICTA 1988 or Section 386 ITEPA 2003 and
- All of the income and gains of the scheme (whether as a non-approved scheme before 6 April 2006 or as an employer-financed scheme after on or after that date) have been within the charge to UK tax and
- The lump sum is provided to the employee, a relative of the employee, the personal representatives of the employee, an ex-spouse of the employee or any other individual designated by the employee
- The scheme was entered into before 1 December 1993 and has not been varied since then (see EIM15416 for the meaning of “varied”)
then part of the lump sum is not taxed. That part is found as follows:
- Ascertain the market value of the assets of the scheme on 5 April 2006 (the ‘responsible person’ for the scheme - see EIM15056 - will be able to provide this information). Say this is £50,000.
- Increase that value by the percentage increase in the Retail Prices Index between April 2006 and the month in which the lump sum is provided (see CG17290). Say the increase is 15%; the increased value is then £50,000 + 15% = £57,500.
- Ascertain what fraction of the assets of the scheme the employee would have been entitled to if the scheme had been wound up on 5 April 2006 (the ‘responsible person’ for the scheme - see EIM15056 - will be able to provide this information). Say the employee would on this basis have been entitled to ¾ of the scheme’s assets.
- Apply the same fraction as in step 3 above to the sum calculated at step 2 above. ¾ of £57,500 = £43,125. This amount is the part of the lump sum that is not taxed.
- Deduct that amount from the lump sum received - say it is £85,000 - to find the amount to be taxed, which is therefore £85,000 - £43,125 = £41,875 (Note: no allowable loss can be created).