EIM75920 - The taxation of pension income: armed forces pension payments
Overview
Disability pension payments
Pensions paid in respect of death due to war service
Ill-health lump sums provided under an armed forces early departure scheme
Awards for bravery
Overview
Certain pension payments and allowances paid to members of the armed forces where they have been disabled in service, and to their survivors where death was caused by service, are exempt from tax. Certain additional pensions and annuities paid in respect of awards for bravery may also be tax-free, along with ill-health lump sums provided under an armed forces early departure scheme.
Pension payments that are not subject to an exemption are taxable under:
- section 579A ITEPA 2003 where the payment is made from one of the Armed Forces Pension Schemes that are registered pension schemes (see EIM75400)
- section 569 ITEPA 2003 which taxes pensions paid by or on behalf of a person in the UK, including pensions and annuities paid by the Crown, for pensions from other sources - see EIM75200 for further information
Disability pension payments
Section 641 ITEPA 2003
Specified disability pensions and awards are exempt from Income Tax. They are paid tax-free whether the disability occurred in time of war or peace.
If the Secretary of State certifies that a pension or retired pay of a kind listed below is only partly attributable to a disability caused by service, only the part of the payment attributable to the disability will be tax-free.
A disability pension awarded for a disability not caused by service is taxable, unless it falls under section 640A ITEPA 2003; see the section Ill-health lump sums provided under an armed forces early departure scheme below.
A disability pension paid by a foreign government to former service personnel resident in the UK may be exempt from tax but not under Section 641; see instead the section ‘Disability pensions paid due to injury or illness at work’ at EIM75080.
The Armed Forces Compensation Scheme (AFCS), established under the Armed Forces (Pensions and Compensation) Act 2004, compensates for disabilities caused by service in the armed forces on or after 6 April 2005. The compensation is 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, whether or not they are still serving. AFCS benefits include lump sums and guaranteed income payments. For more information, see Armed Forces Compensation Scheme (AFCS).
Pension payments exempt under section 641 are:
- a wounds pension granted to a member of the armed forces of the Crown
- 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
- a 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
- a disability 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
- an injury or disability pension payable under any War Risks Compensation Scheme for the Mercantile marine
- a disability pension payable under any scheme made under section 3, 4 or 5 of the Pensions (Navy, Army, Air Force and Mercantile Marine) Act 1939
- 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
A person’s length of service may be taken into account when calculating the amount of a pension payment listed above, however the whole of the disability pension should be tax-free providing the reason for the retirement was a disability caused by service.
Combined service and disability pensions
Where a member of the armed forces is invalided out in circumstances which qualify them for both a disability pension (caused by service) and a service pension, the combined pension should be regarded as exempt from Income Tax under Section 641.
Where a member of the armed forces retires, not because of a disability but because, for example, their period of service has ended, and after retirement establishes a claim in respect of a disability caused by service, any additional disability pension awarded will be exempt from Income Tax under section 641. However, the service pension will remain taxable.
Disability following re-enlistment
A former member of the armed forces receiving a service pension may re-join and suffer a disability caused by the later period of service. In these circumstances, only the additional disability pension will fall within section 641(1). The original pension (recalculated in some cases by reference to the further period of service) will remain taxable.
Additional allowances
Disability pensions are frequently enhanced by allowances that take into account the pensioner’s personal circumstances and the extent of the disability. These allowances may be regarded as covered by the exemption within section 641, dependent on the allowance and the associated circumstances.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Pensions paid in respect of death due to war service
Sections 639 and 640 ITEPA 2003
The Armed Forces Compensation Scheme (AFCS), established under the Armed Forces (Pensions and Compensation) Act 2004, compensates surviving adult dependants (spouses, civil partners, partners lived with as spouse or civil partner) for death caused by service in the armed forces on or after 6 April 2005. For more information, see Armed Forces Compensation Scheme (AFCS).
Specified pensions and allowances in respect of death due to service, payable to dependants, are exempt from Income Tax. These may be available to dependants of persons who died on or after 6 April 2005 if it is due to illness or injury that occurred in service before that date.
To be exempt from tax, the pension must meet one of the following criteria:
- it is payable in respect of death due to service in the armed forces, wartime service in the merchant navy or war injuries, and paid by or on behalf of the Ministry of Defence under a specific Regulation, Scheme or Order
- it is payable by the Ministry of Defence in respect of death due to peacetime service in the armed forces of the Crown before 3 September 1939 and subject to similar conditions and rates as a pension above
- It is payable under the law of a country other than the UK and is substantially similar in character to either of the above pensions.
The amount of pension or allowance payable under any one of these provisions may be withheld because of another pension or allowance. Where that happens an amount of the other pension or allowance equal to the withheld pension is exempt from tax instead.
The specific Regulations, Schemes and Orders referenced above are:
- Defence (Local Defence Volunteers) Regulations 1940
- War Pensions (Coastguards) Scheme 1944
- War Pensions (Naval Auxiliary Personnel) Scheme 1964
- Pensions (Polish Forces) Scheme 1964
- War Pensions (Mercantile Marine) Scheme 1964
- Order by Her Majesty concerning pensions and other grants in respect of disability or death due to service in the Home Guard
- Order by Her Majesty concerning pensions and other grants in respect of disability or death due to service in the Home Guard after 27 April 1952
- Order by Her Majesty concerning pensions and other grants in respect of disability or death due to service in the Ulster Defence Regiment
- Personal Injuries (Civilians) Scheme 1983
- Naval, Military and Air Forces etc. (Disablement and Death) Service Pensions Order 1983.
Ill-health lump sums provided under an armed forces early departure scheme
Section 640A ITEPA 2003
Lump sums paid to individuals who leave the armed forces due to ill-health or another condition which has not been caused mainly by their service may be tax-free. A lump sum paid from an early departure payments scheme is exempt from Income Tax providing the scheme has been established by either:
- the Armed Forces Early Departure Payments Scheme Order 2005
- the Armed Forces Early Departure Payments Scheme Regulations 2014
Awards for bravery
Section 638 ITEPA 2003
Additional pensions or annuities paid to the holder of a specified award for bravery in respect of the award are exempt from Income Tax. The specified awards are:
- the Victoria Cross
- the George Cross
- the Albert Medal
- the Edward Medal
- the Military Cross
- the Distinguished Flying Cross
- the Distinguished Conduct Medal
- the Conspicuous Gallantry Medal
- the Distinguished Service Medal
- the Military Medal
- the Distinguished Flying Medal