Annual payments: exemptions
Amounts not taxable as annual payments
ITTOIA05/S683 taxes as annual payments amounts that are not taxed elsewhere in the Taxes Acts. The priority of charging rules ensure that income chargeable as trading, property, employment or other types of savings and investment income, is not chargeable as an annual payment. See SAIM1070.
In addition, ITTOIA/S683 (4) lists a number of types of payment that are not taxable as annual payments. For the most part these are payments that are exempt from income tax under any part of the Taxes Acts. Exempt income is set out in Part 6 of ITTOIA05 and the exemptions for ‘other annual payments’ are in Chapter 8 of Part 6.
Annual payments made by individuals
An annual payment made by an individual (or his or her personal representative) is not chargeable to income tax (ITTOIA05/S727). This is subject to a number of qualifications.
- Payments made by traders for commercial reasons are taxable (ITTOAI05/S728).
In example 4 in SAIM8050, annual payments received by Mohammed would be taxable in his hands, because the payer (Tariq) is making them for the purposes of his trade. They would be deductible expenses in arriving at Tariq’s trading income, under normal computational rules.
- Payments made by an individual for non-taxable consideration (that is, not taxable in the payer’s hands) are taxable on the recipient. Relatively few annual payments are likely to be taxable under this category. It does not apply to payments on divorce or separation, or payments on surrendering etc, settled property (ITTOIA05/S729).
- Maintenance payments that arise outside the UK, are exempt provided they would be exempt had they arisen in the UK (ITTOIA05/S730).
Periodical payments of personal injury damages
All periodical payments in respect of personal injuries made under Court orders or agreements that settle claims for damages are exempt from income tax by ITTOIA05/S731. ‘Personal injury’ includes death from personal injury. See SAIM2330 for guidance on interest on such damages.
Payments from annuities purchased to meet an award made by the Criminal Injuries Compensation Board are exempt from income tax (ITTOIA05/S732). Similarly, SI 2004/1819 exempts periodical payments made by the Thalidomide Children’s Trust.
SI 2017/446 and SI 2017/904 respectively exempt periodical payments made by the Scottish Infected Blood Support Scheme from 13 April 2017 and the Infected Blood Schemes for England, Wales and Northern Ireland from 23 October 2017 to individuals infected with HIV and Hepatitis C through contaminated blood or blood products used by the NHS. Prior to the introduction of these new schemes, SI 2010/673 provided an exemption for similar payments made by MFET Ltd and SI 2012/1188 provided an exemption for payments made by the Skipton Fund.
ITTOIA05/S733 and S734 explains that the persons entitled to these exemptions are the person entitled to the damages, or the person who receives payment on their behalf, or a trustee for such a person.
Health and unemployment insurance payments
Payments received from certain insurance policies that provide sickness and unemployment benefits are exempt from income tax by ITTOIA05/S735. The Insurance Policyholder Taxation Manual (IPTM6000) has more details.
Payments to adopters
ITTOIA05/S744 to S747 exempt payments to adopters from income tax.
Other exempt income
Chapter 9 of Part 6 of ITTOIA05 lists ‘other income’ which is exempt from income tax. This has the effect of exempting certain types of income which might otherwise be an annual payment. Note in particular that this applies to housing grants (ITTOIA05/S769) and scholarship income (bursaries and similar educational grants) (ITTOIA05/S776).