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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Unauthorised payments: deemed or specific situations that are unauthorised payments: benefits in kind: valuation - cash equivalent or annual values

Glossary PTM000001
   

 

Cash equivalent of benefit in kind
Additional expenses
Amounts made good
Cash assets
Annual value of land
Annual value of other assets

 

Cash equivalent of benefit in kind

The legislation setting out how to measure the cash equivalent of a benefit in kind is in Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Detailed guidance is in the Employment Income Manual from EIM21000.

Benefits provided by a registered pension scheme to a person who is, or has been, a member are calculated in the same way as they would be if they were provided by an employer to an employee.

The general rule is that the cash equivalent of the pension benefit in kind is the cost of the benefit to the scheme less any part of that cost made good by the member - see below. However, there are special rules for certain assets (living accommodation or cars and vans and related benefits).

Where the asset provided is not living accommodation or cars, vans or related benefits the cost of the benefit to the scheme is the higher of

  • the annual value of the asset (see Annual value of land) and
  • the annual amount of the sums, if any, paid by the scheme by way of rent or hire charge for the asset,

together with the amount of any additional expenses.

Where the asset provided is living accommodation see PTM133930

Where the asset provided is cars, vans or related benefits see PTM133950

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Additional expenses

Except in the case of car and van benefits, the cost of any additional expenses incurred by the scheme in providing the use of an asset is also charged on the member as an unauthorised payment.

The following additional expenses are not included:

  • the expense of acquiring or producing the asset incurred by the scheme, and
  • any rent or hire charge payable for the asset by the scheme which has already been taken into account in calculating the annual value.

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Amounts made good

Where a person who is, has been, a member ‘makes good’ the cost of using the asset to the scheme, this amount will be deducted from the unauthorised payments charge. If the scheme allows the person to use an asset and charges a rent then the rental payment will be included in the sums made good.

Example

Julie is a member of K Ltd Registered pension scheme (which is not an investment regulated pension scheme). For this tax year she is provided with exclusive use of an antique diamond necklace owned by the scheme.

The value of the necklace was £20,000 at the time it was made available to Julie.

The annual value is £20,000 @ 20% = £4000 (see heading below).

Rather than pay the full amount of £4000 of the annual value, the scheme asks Julie to pay £500 towards the use. She pays the amount in full to the scheme.

Julie will be subject to an unauthorised payments tax charge as follows

£3,500 (£4,000 less amount made good £500) @ 40% = £1,400.

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Cash assets

Any cash assets, including vouchers, use of credit cards etc made available by the scheme are treated as unauthorised payments taxable on the person who is, or has been, a member.

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Annual value of land

The annual value of the use of land (other than living accommodation), means its annual rental value as defined in section 207 ITEPA 2003 - this is the rent that might be expected to be obtained on a commercial letting from year to year if

  • the tenant undertook to pay all taxes, rates and charges usually paid for by the tenant, and
  • the landlord undertook to bear the costs of the repairs and insurance and other expenses (if any) necessary for maintaining the land in a state to command the rent.

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Annual value of other assets

The annual value of any other asset (except land, living accommodation, cars, vans and related benefits) is 20% of the market value of the asset as at the time the scheme first made the asset available as a pension scheme related benefit.

Example

On 6 April 2013 the scheme (which is not an investment-regulated pension scheme) makes a painting available to John for private use.

The market value of the painting as at 6 April 2013 is £50,000.

Amount of unauthorised payment made to John is £50,000 x 20% = £10,000 for the tax year 2013-14.

On 6 April 2014 the painting has a market value of £55,000 and is still being made available to John.

The unauthorised payment charge for 2014-15 will remain at £50,000 x 20% as this is the value at the time the asset was first made available to him. Alternatively if, on 6 April 2014, the value of the asset had dropped to £45,000 the benefit will still be calculated on a value of £50,000.