Disability pensions: exemption where employment ceased due to disablement
Section 644 ITEPA 2003Section 644 ITEPA 2003 exempts certain disability pensions in whole or in part. It enshrines in statute an Extra-Statutory Concession (ESC A62) that applied before 6 April 2003. The exemption covers certain pensions paid in consequence of disablement caused by injury while at work or work-related illness. Section 644 applies to a disablement pension if:
- the pension is payable because a person has ceased to hold an employment or office because of disablement and
- the disablement is attributable to the performance of the duties of the employment or office or war injuries.
Note: the exemption is not available for pensions or annuities that before 6 April 2006 were chargeable under Section 580 ITEPA 2003 (approved retirement benefit schemes) or Section 590 ITEPA 2003 (former approved superannuation funds), see EIM74009. For 2006-07 onwards, the exemption is not available for pensions (including annuities) under registered pension schemes chargeable under Section 579A ITEPA 2003, see EIM74014.
The exempt amount is determined in accordance with the following steps.
- Step 1 - determine the pension that would have been payable had the person ceased to hold the employment or office because of the disablement but the disablement had not been attributable to the performance of the duties of the employment or office or to war injuries.
- If no pension would have been payable under step 1, then the whole of the disablement pension is exempt.
- If a pension of a smaller amount would have been payable, the exempt amount is the amount by which the disablement pension exceeds the smaller amount.
- In all other cases, the exempt amount is nil.
Example 1An employee is injured in an explosion at work. There is no pension entitlement under the employer’s registered pension scheme. However, the employer offers a pension of £20,000 per year as the employee is unable to work as a result of the injuries suffered in the blast. Section 644 exempts all of the £20,000 from tax.
Example 2Another employee is injured in the same explosion. He is a member of the staff pension scheme operated by the employer. He is offered early retirement on ill-health grounds as he is unable to work in consequence of injuries suffered in the explosion. Section 644 cannot apply to this pension because it is chargeable under Section 579A ITEPA 2003 (registered pension schemes). It is all taxable.
Example 3A third employee is also injured in the explosion. She takes early retirement on ill-health grounds and receives a pension from the staff pension scheme. The pension is quite small so the employer decides to pay an additional sum of £10,000 per year in consequence of injuries suffered. The pension from the registered pension scheme is taxable under Section 579A ITEPA 2003. The additional pension from the employer of £10,000 is chargeable under Section 569 ITEPA 2003 (UK pensions) and is exempt under Section 644.
CommentSection 644 is unlikely to exempt a pension paid to an employee who takes early retirement on ill- health grounds as the same pension could be awarded in consequence of illness or disability unrelated to work. The exemption only covers a pension or part pension arising wholly from work-related disability or illness.
The exemption does not apply in the case of a dependant’s pension paid on the death of a person whose pension qualified for the exemption. This is because the dependant’s pension is payable because of the person’s death and not because a person has ceased to hold an employment due to disablement attributable to the performance of the duties of the employment.