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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Pensions: particular occupations: armed forces: statutory exemption for specified wounds and disability pensions

Section 641 ITEPA 2003

Section 641(1) provides that no liability to income tax arises on:

  1. a wounds pension granted to a member of the armed forces of the Crown
  2. retired pay of a disabled officer granted on account of medical unfitness attributable to or aggravated by service in the armed forces of the Crown
  3. a disablement or disability pension granted to a member of the armed forces of the Crown, other than a commissioned officer, on account of medical unfitness attributable to or aggravated by service in the armed forces of the Crown
  4. a disablement pension granted to a person who has been employed in the nursing services of any of the armed forces of the Crown on account of medical unfitness attributable to or aggravated by service in the armed forces of the Crown
  5. an injury or disablement pension payable under any scheme made under the Injuries in War (Compensation) Act 1914
  6. an injury or disablement pension payable under any War Risks Compensation Scheme for the Mercantile marine
  7. a pension granted to a person on account of disablement, and payable under any scheme made under section 3, 4 or 5 of the Pensions (Navy, Army, Air Force and Mercantile Marine) Act 1939
  8. a benefit under a scheme established by an order under section 1(2) of the Armed Forces (Pensions and Compensation) Act 2004 payable to a person by reason of his illness or injury by way of a lump sum, or following the termination of the person’s service in the armed forces or reserve forces.

If the Secretary of State certifies that a pension or retired pay of a kind listed above is only partly attributable to disablement or disability, only the part attributable to disablement or disability will fall within section 641(1).

Injury or disablement pensions under subsection 1(f) and 1(g) are payable by the Ministry of Defence to merchant seafarers (including naval auxiliary personnel and persons serving in the fishing fleets and the pilotage and light vessel services).

Section 641 covers a wide variety of pensions and awards in respect of disablement including all War Disablement Pensions administered by the Veterans Agency, an executive agency of the Ministry of Defence. Relief from income tax applies whether the disablement was contracted in time of war or peace.

Disablement caused by service on or after 6 April 2005

Awards in respect of disablement caused by service in the armed forces on or after 6 April 2005 have to be made under the Armed Forces Compensation Scheme (“the AFCS”) established under section 1(2) of Armed Forces (Pensions and Compensation) Act 2004. The AFCS provides for benefits to be payable to a person by reason of illness or injury (whether physical or mental), which is attributable (wholly or partly) to service in the armed forces or the reserve forces. AFCS benefits include lump sum payments to armed forces personnel who remain in service in addition to lump sums and Guaranteed Income Payments paid after termination of service. No liability to income tax arises on these AFCS benefits by virtue of section 641(1)(h) introduced by section 16(6) Finance Act 2005 which has effect for tax years 2005-06 onwards.

Practical issues

See EIM74303 for further guidance on how the section 641 exemption applies in practice. EIM74304 lists a number of allowances intended to supplement an exempt pension that may be regarded as covered by the section 641 exemption.