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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: retirement benefits etc: example

Section 554W ITEPA 2003

This example illustrates the rules of Section 554W discussed in EIM45635.

Assume the following facts.

  • A is a member of an EFRBS (not registered).
  • A has a lump sum entitlement of 50% of the fund.
  • A’s rights accrued, in part, before 6 April 2011.
  • A’s rights under the scheme are valued in total at £1 million.
  • On 1 March 2012, A receives a lump sum of £500,000 wholly out of these rights.

The payment of this lump sum is a relevant step within Section 554C.

The rights out of which the lump sum is paid accrued, in part, before 6 April 2011. So, an apportionment is needed.

The lump sum needs to be apportioned between:

  • A’s pre-6 April 2011 lump sum rights, and
  • A’s other rights.

A’s pre-6 April 2011 rights consist of:

  • contributions made before 6 April 2011, and
  • growth on those contributions up to the time when the lump sum is paid.

Recall that A is not entitled to take 100% of the fund as a lump sum. Therefore, A’s ‘pre6April 2011 rights’ include but are wider than A’s ‘pre-6 April lump sum rights’.

A’s post-5 April 2011 rights consist of:

  • contributions made after 5 April 2011, and
  • growth on those contributions up to the time when the lump sum is paid.

Assume that, on a just and reasonable basis:

  • A’s pre-6 April 2011 rights are valued at £800,000, and
  • A’s post-5 April 2011 rights are valued at £200,000.

A has a lump sum entitlement of 50% of the fund, therefore A’s pre-6 April 2011 lump sum rights are valued, on a just and reasonable basis, at 50% x £800,000 = £400,000.

So, Section 554W treats the payment of the lump sum as two separate relevant steps:

  • one in relation to the lump sum so far as paid out of A’s pre-6 April 2011 lump sum rights, and
  • one in relation to the lump sum so far as paid out of A’s other rights.

The former step is valued at £400,000. Section 554W stops it giving rise to Part 7A income. However, it is still potentially subject to charge under Section 394 ITEPA 2003 see EIM15010 onwards.

The latter step is valued at £100,000. As far as Section 554W is concerned, there is nothing to stop it giving rise to Part 7A income.