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HMRC internal manual

Employment Income Manual

Non-approved schemes: commutations

Section 394 ITEPA 2003

An individual entitled to a pension from a retirement benefits scheme may have, or be given, the option to take a lump sum in place of that pension. Pension commutation payments received from non-approved schemes are taxable under Section 394 ITEPA 2003 - see the guidance for lump sums in EIM15401.

If a lump sum payment is made in commutation of rights to non-cash benefits under a non-approved scheme then the payment will be taxable under S394 ITEPA 2003.

Commutation payments from overseas schemes may be within Extra-Statutory Concession A10 (see EIM15418). Any charge to tax under Section 394 ITEPA 2003 will therefore be reduced or eliminated under the terms of that concession if the employee has foreign service in the relevant employment. See examples at EIM15325 and EIM15326 substituting a commutation payment for a lump sum in each case.