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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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The benefits code: exemptions from charge

Part 4 ITEPA 2003 and Section 227 ITEPA 2003

Employment income consists of:

Benefits are treated as general earnings (EIM00513). Some benefits, that are not excluded benefits (EIM20006), arenevertheless exempt from charge.

Exemptions from charge

There are two different kinds of exemption (Section 227(1) ITEPA 2003):

  • an “earnings-only exemption” (Section 227(2)) and
  • an “employment income exemption” (Section 227(3)) that removes any charge to tax as employment income of any kind.

Earnings-only exemption

An earnings-only exemption removes any charge to tax as general earnings. The benefits code charges income as general earnings and so an earnings-only exemption will exempt from charge any income arising under the benefits code. But an earnings-only exemption does not necessarily exempt income from tax altogether, it may be taxable as another form of specific employment income.

For example, Section 307 ITEPA 2003 exempts from charge as earnings under the benefits code any expense incurred by an employer for an employee in respect of a pension, or similar payment, payable to the employee on death or retirement. However, as an earnings-only exemption, Section 307 does not prevent a charge arising under another provision that taxes the payment as specific employment income, rather than as general earnings (see EIM00512). For example, payments and benefits on termination of employment under Part 6 Chapter 3 ITEPA 2003 (EIM15120).

Employment income exemption

An employment income exemption is much broader in effect than an earnings-only exemption. It ensures there is no possibility of charge under any provision of the Income Tax (Earnings and Pensions) Act 2003.

Where a benefit forms part of employment income because it is specific employment income, an earnings-only exemption will not matter when deciding whether or not the benefit is chargeable as employment income.

See EIM21240 for more information on exemptions from charge.