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HMRC internal manual

Savings and Investment Manual

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Deduction of tax: annual payments

Deduction of tax from annual payments

Chapter 6 of Part 15 of ITA07 requires the deduction of tax at the basic rate from qualifying annual payments and patent royalties. The legislation is based on the rules formerly in ICTA88/S348 and S349, and some other parts of ICTA.

The only annual payments that require deduction of tax are those made by individuals who are traders, and those made by companies.

See SAIM8000 for more on annual payments.

Meaning of annual payment

ITA07/S899 defines a ‘qualifying annual payment’. The payment must arise in the UK. Interest, qualifying donations and gift aid, certain payments made by trustees, and annual payments for dividends or other non-taxable consideration, are not qualifying annual payments.

Where the recipient is a person other than a company, ‘annual payment’ means a payment charged to income tax of

  • a purchased life annuity
  • royalties etc from intellectual property
  • certain telecommunication rights
  • annual payments under Chapter 7 of Part 5 of ITTOIA05 (amounts not otherwise charged)
  • certain employment related annuities.

In practice few such payments are likely to be made by individuals who are not traders, and as explained below only annual payments made for commercial purposes are subject to the requirement to deduct tax, and only such payments are given tax relief (SAIM9060)

Where the recipient is a company it means any of the above (excluding employment related securities), or a payment charged to corporation tax under Case III Schedule D.

Deduction of tax

Most annual payments made by individuals are exempt from the charge to tax (ITTOIA05/S727, which derives from ICTA88/S347A - SAIM9050). However, this exemption does not apply to annual payments made for commercial reasons in connection with the individual’s trade, profession or vocation (ITTOIA05/S728). ITA07/S900 requires deduction of tax from commercial payments made by individuals. It differs from the previous rule in ICTA88/S348 in that it requires (rather than permits) the deduction of basic rate income tax at the rate in force for the tax year in which payment is made (rather than as before the year the payment was due).

Whether the annual payment is deducted in computing profits of the trade, or relieved under ITA07/S448 (SAIM9060), the payer is required to deduct tax.

ITA07/S901 requires the deduction of tax from any annual payment made by a person other than an individual.

The tax will generally be collected through the individual’s or the person’s self assessment, or if not, by direct assessment (SAIM9160).