Employer-financed retirement benefits schemes: example: receipts excluded from charge: prior employer contributions
Section 394 ITEPA 2003 and Paragraphs 53-55 Schedule 36 FA 2004
[Notice: for cases involving payment after 5 April 2011, the guidance on this page should be read with the notice at the top of EIM15015]
On 1 January 2007 an employee receives a £100,000 lump sum on retirement from an employer-financed retirement benefits scheme (see EIM15010).
The employer contributed £500 per month to the scheme for 10 years until December 2005 when contributions ceased. These contributions were taxed on the employee under s595 ICTA 1988 and Section 386 ITEPA 2003 (see EIM15412).
All of the income and gains of the scheme (whether as a non-approved scheme before 6 April 2006 or as an employer-financed retirement benefits scheme after on or after that date) have been within the charge to UK tax.
The £100,000 lump sum falls within Section 394 ITEPA 2003 but all the conditions in EIM15125 are met. There is therefore no charge under that Section.
The facts are as in example 1 above except that the employer continued to contribute until December 2006.
Because the employer made contributions both before and on or after 6 April 2006, the rules in EIM15128 apply. Part of the lump sum is not taxed under Section 394 and the example within EIM15128 explains how that exempt part is arrived at.