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HMRC internal manual

Savings and Investment Manual

Deduction of tax: annual payments and yearly interest: overview: the old rules

Sections 348 to 350 ICTA 1988

ICTA88/S348 and ICTA88/S349 applied to

  • annuities and other annual payments (ICTA88/S348 (1) and ICTA88/S349 (1)(a));
  • royalties or other sums paid for the use of a patent (ICTA88/S348 (2) and ICTA88/S349 (1)(b));
  • annual interest (ICTA88/S349 (2)).

ICTA88/S348 entitled the payer to deduct tax from the annuity or other annual payment, or the patent royalty. Tax was collected from the payer by virtue of the fact that he was subject to tax on all his income, without deducting the payment, but without the charge using up any part of his basic rate band.

ICTA88/S348 could only work where the payer had sufficient income. Personal reliefs and terminal loss relief were reduced to ensure that sufficient income remained to cover charges. Where this was not possible, ICTA88/S349 applied. Deduction of tax was mandatory and the tax was collected by assessment under ICTA88/S350, or in the case of companies, in accordance with ICTA88/SCH16.

However, ICTA88/S347A removed most annual payments made by individuals from sections 348 and 349 so that deduction of tax ceased to apply, with effect from 15 March 1988. The exceptions which were still treated as annual payments within sections 348 and 349 were

  • payments made under existing obligations;
  • payments made for genuine commercial reasons in connection with the individual’s trade, profession or vocation - ‘trade charges’ (see BIM42601).

Section 347A did not apply to interest payments, which remained subject to deduction of tax by virtue of Section 349(2). Companies, partnerships which include a company, and local authorities were subject to this requirement (see CTM35000 onwards SAIM20000). However, ICTA88/S349A removed the requirement on UK resident companies to deduct tax from other UK resident companies with effect from 1 April 2001, and extended the exemption to local authorities from 1 October 2002 (see SAIM9150).

In practice, the only remaining cases where individuals were still required to deduct tax were from trade charges and from interest paid to another person whose usual place of abode was outside the United Kingdom.