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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Tax treatment of Local Authority officials and employees: terminal gratuities for non-pensionable service

 This guidance deals with the tax treatment of terminal gratuities made since 6 July 1995 for non- pensionable service under the Local Government Superannuation (Gratuities) Regulations 1995 (SI 1995/1497) and the Local Government (Discretionary Payments) Regulations 1996 (SI 1996/1680).

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

The regulations allow local authorities, at their discretion, to pay lump sum gratuities on termination of employment to employees who have not been members of the Local Government Superannuation Scheme for the whole or part of their service.

Under these regulations, lump sum gratuities may be made under separate schemes for redundancy, death in service and retirement. Deal with them as follows:

  • Redundancy lump sum: chargeable under Section 401 ITEPA 2003 (see EIM13750)

 

  • Retirement lump sums where the scheme under which the payments are made was approved by HMRC before 6 April 2006 so the scheme automatically became a registered pension scheme (see EIM74014) on 6 April 2006:  Provided no benefits are paid in relation to service after 5 April 2006, any lump sum is exempt from tax.
  • Retirement lump sums where the scheme covers post 5 April 2006 service or the scheme was not approved before 6 April 2006 but became a registered pension scheme on or after that date:  the maximum tax exempt retirement lump sum payable is 25% of the amount of the gratuity awarded.  The remaining 75% has to be used to provide a pension but this amount may be commuted to a lump sum taxed at the individual’s marginal rate, where the total amount of the gross payment to the employee (including the tax free element) is not more than £10,000 (see regulation 11 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 – SI 2009/1171).
  • Retirement and death lump sums where the scheme was not approved before 6 April 2006 and has not become a registered pension scheme since then: in view of the relatively small level of gratuities permitted under the 1996 regulations, most local authorities are likely to make the payments themselves directly under an employer-financed retirement benefits scheme (EFRBS). The lump sums will therefore be within Section 393 ITEPA 2003 (see EIM15100).  If, unusually, the lump sum is not paid directly by the local authority but is instead paid via a third party, the rules at Part 7A ITEPA 2003 might apply (see EIM45000).

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)