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HMRC internal manual

Employment Income Manual

Non-approved schemes: example: payment on non-accidental death

Section 394 ITEPA 2003 and Section 612(1) ICTA 1988

An employee died of natural causes on 1 April 2005.

The director of the personnel department of the company the employee worked for decides to make an ex-gratia payment to the employee’s spouse of £50,000. This payment is in addition to a lump sum of £12,500 payable to the employee’s estate under the terms of the employer’s approved retirement benefits scheme (see second paragraph of EIM15400).

The £50,000 payment is made on 20 April 2005. Because this date fell before 6 April 2006, you have to consider whether the scheme is a non-approved scheme (see EIM15402).

An ex-gratia payment like this is a gratuity - a gift - and so is a ‘relevant benefit’ (see the definition of relevant benefit in EIM15403). So a retirement benefits scheme is created by the payment (see the definition of scheme in EIM15406).

The payment is not from a scheme approved by Audit & Pension Scheme Services (APSS) and so is not exempt from tax (see second paragraph of EIM15400). Neither could it have been given approved status under Statement of Practice 13/91 because:

  • there is another lump sum benefit (of £12,500) from an approved scheme payable in respect of the employment, so the first test in EIM15428 is not met
  • the sum is over the limit (£8,800 for 2005/20006 for a small payment approval (see EIM15429).

The payment is therefore chargeable on the spouse of the employee and counts as employment income. For the year of receipt see EIM15411.

See example EIM15436 regarding death by accident.