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HMRC internal manual

Savings and Investment Manual

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Annual payments: introduction

Introduction

Annual payments are payments made under a legal obligation. They are taxed on the recipient in the same way as savings and investment income, although under Part 5 (Miscellaneous Income: annual payments not otherwise charged) rather than Part 4 (Savings and Investment Income) of ITTOIA 05.

A particular characteristic of annual payments is the obligation on the payer to deduct tax at source. This is explained in SAIM9000 onwards.

How annual payments are taxed

ITTOIA05/S683 (1) charges to income tax all annual payments that are not taxed under any other provision of ITTOIA, or under any other Act. SAIM8020 gives guidance on the meaning of ‘annual payment’.

This is subject to a number of statutory exemptions, which are listed at ITTOIA05/S683 (4) - see SAIM8070.

For years before 2005-06, ‘any annuity or annual payment’ was taxed under Case III. The ITTOIA provisions do not reproduce the reference to annuities, because it is now unusual for annuities to be taxed in the same way as interest. SAIM8060 tells you more about annuities.

Annual payments continue to be taxed in the same way as interest, although the statutory provisions are in Chapter 7 Part 5 ITTOIA 2005. The person chargeable is the person ‘receiving or entitled to’ the income (ITTOIA05/S685, and see SAIM2400), and they are taxed on the full amount of annual payments arising in the tax year (ITTOIA05/S684). Annual payments that have a non-UK source are subject to the same special rules that apply to interest from outside the UK (SAIM1130).

Annual payments arising to a UK resident in the overseas part of a split year are treated as arising to a non-UK resident.

Individuals or trusts receiving annual payments from UK companies will receive them under deduction of tax. Tax is deducted from annual payments at the basic rate, not the lower rate. This is because, unlike interest, annual payments are not included in the list at ITA07/S18 of income that is charged at the special rates for savings and dividend income.

Where an individual receives annual payments after deduction of tax, the basic rate tax deducted is treated as tax they themselves have paid (ITTOIA05/S686). This means that no further basic rate liability arises, although the recipient may still be liable at the higher rate.

There are examples at SAIM8050 of the taxation of annual payments.