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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employer-financed retirement benefits schemes: commutations

Section 394 ITEPA 2003

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

Section 394 provides a charge on lump sums provided as relevant benefits from an employer-financed retirement benefits scheme (EFRBS). An individual entitled to a pension from such a scheme may have, or be given, the option to take a lump sum in place of that pension (an action known as ‘commutation’).

Lump sums paid before 6 April 2011

Before 6 April 2011, lump sums, including pension commutation payments received from EFRBS, were taxable under Section 394 ITEPA 2003 (unless relieved by any transitional charging provisions) - see the guidance for lump sums in EIM15015.

Lump sums paid on or after 6 April 2011

After 5 April 2011, the payment of such lump sums may be subject to charge through Part 7A ITEPA 2003. However this is subject to the usual conditions on when Part 7A applies (see EIM45000). In particular:

  • where some or all of the rights to receive the lump sum accrued before 6 April 2011, that earlier accrual may be excluded from Part 7A charges by Section 554W (see EIM45635). If so, the portion of the lump sum to which Part 7A charges do not apply remains open to charge under Section 394;
  • similarly, Part 7A does not apply where the lump sum is provided directly by the employer (not acting as a trustee), in which case Section 394 will apply instead.

Where a Section 394 charge applies and the scheme is overseas, the mechanics of charging such lump sum payments also depend on when the right accrued:

  • to the extent that the right accrued before 6 April 2011 and was paid before 5 February 2014, then Extra-Statutory Concession A10 may give relief from charges under Section 394 (see EIM15082 and EIM15083 for the conditions);
  • to the extent that the right accrued before 6 April 2011 and was paid on or after 5 February 2014, then Section 395B ITEPA 2003 continues to provide the same effect as ESC A10 mentioned above. It should be noted that Section 395B can only be used in cases where Part 7A ITEPA 2003 is prevented from charging the payment, either because of direct employer provision or by the application of Section 554W as outlined above. This is because Section 395B can only provide exemption from charges under Section 394, which in turn can only apply if Part 7A charges do not;
  • to the extent that the right accrued after 5 April 2011, then Section 554Z4 may give relief in respect of benefits for non-UK service in tax years after 5 April 2011 when the member was non-UK resident – see EIM45720. The circumstances allowing application of Section 554Z4 to prevent charges under Part 7A can also prevent Section 394 from applying through the exclusion in Section 394(4C)(c).

For further information see the examples at EIM15326 (substituting a commutation payment for a lump sum in each instance, if appropriate to the case at hand).