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HMRC internal manual

Employment Income Manual

Benefits: pension provisions

Section 307 ITEPA 2003

No charge can arise under Part 3 Chapter 10 ITEPA 2003 in respect of the expense incurred by an employer in providing for the employee a pension or similar benefit payable on the employee’s death or retirement.

The exemption applies to the provision of:

  • a pension or annuity
  • a lump sum
  • a gratuity and
  • any similar benefit.

It covers provisions made for the employee or the employee’s family or household (Section 721(5) ITEPA 2003).

See EIM21801 where the provision is financed by a company in the same group as the employer.

Note that the exemption only applies to a charge under Part 3 Chapter 10. It is an earnings-only exemption (see EIM20030). It does not prevent liability arising under any other provision that charges the cost of providing a pension.

For details of the charges to tax as employment income that can arise where an employer makes contributions to a non-approved retirement benefits scheme, or following the making of contributions to such a scheme, see EIM15010 onwards.

Where an employer makes contributions to a registered pension scheme, including to family members’ own arrangements under such a pension scheme, see EIM01570.

Where an employer incurs expenditure  providing for employee benefits, for example under a life assurance policy, and part of the cover qualifies for relief under section 307 and part does not, provided the qualifying element and its cost can be identified and separated out, an apportionment may be made. The qualifying element is exempt from tax under the benefits code.

Costs covering both qualifying and non-qualifying elements which cannot be separated out, are not covered by the exemption.

Pension Protection Fund (PPF)

The PPF came into existence in April 2005. It gives the Board of the PPF powers to take-over under funded occupational pension schemes and to pay compensation to members of those schemes in lieu of their pensions. The PPF will be funded by levies on schemes that are eligible for protection.

PPF will benefit from the same tax exemptions as the schemes it is designed to protect. The PPF levies will become payable in 2005/06. Although levies are payable by pension schemes, in practice they may be paid by employers. Such payments will be relieved in the same way as employer contributions to approved pension schemes. Consequently any payment by an employer to the PPF on behalf of its employees does not give rise to an income tax charge on the employees.