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HMRC internal manual

Tax Credits Manual

Eligibility - income (other than earnings): Income - pensions (Info)

This subject provides guidance on pension income to be included and pension income to be excluded for tax credit purposes.

The remainder of this topic is presented as follows

Payments, pensions and annuities included as pension income for tax credits

You should include any of the payments, pensions or annuities listed below as pension income for tax credits. These mirror the income tax provisions. Broadly, this includes all occupational and registered pension scheme pensions and the basic retirement pension and related payments, for example the earnings related addition under the State Earnings Related Pension Scheme (SERPS).

  • Any annuity, pension or stipend payable by the Crown or out of the public revenue of the UK or of Northern Ireland by virtue of Section 577 of ITEPA. From 6 April 2005, a person could defer their entitlement to their State Pension for a minimum of one year. Therefore, for 2006-2007 onwards, any lump sum payment of a deferred State Pension will be counted as income for tax credit purposes in the year in which it is taxable (Section 7 of Finance (No2) Act 2005 applies).

This includes any increase for a dependant child.

  • Any pension, annuity or income withdrawal to which S579A(c) of ITEPA applies (charge to tax on registered pension schemes).
  • Any lump sum payment to a member of a registered pension scheme to which section 636B or 636C of ITEPA applies. These are payments made when a person has a very small amount of pension savings (for example, from a short-term employment that has ended) which would only provide a very small pension in retirement. These lump sums can also include payments made when a pension scheme is winding up and small lump sum death benefits paid to a surviving dependant to extinguish their rights to a small pension. Note, however, that certain lump sum payments made under the terms of a registered pension scheme as part of retirement income are disregarded (below).
  • Any unauthorised payments from a registered pension scheme to which S208(2)(a) or (b) of the Finance Act 2004 applies.
  • Any pension paid otherwise than by or on behalf of a person outside the UK by virtue of S569 of ITEPA. These are occupational pension schemes not registered or approved for tax purposes. Pensions from overseas sources are taken into account as ‘Foreign Income’.
  • Any pension paid otherwise than by or on behalf of a person outside the UK. Pensions from overseas sources are taken into account as ‘Foreign Income’ by virtue of Regulation 12 of the Tax Credit (Definition and Calculation of Income) Regulations 2002.
  • Any payment or pension that is taxable by virtue of Section 633 of ITEPA (voluntary pensions).
  • Any periodical payment granted out of the House of Commons Members’ Fund and taxable by virtue of Section 619 of ITEPA (parliamentary pension funds).
  • Any annuity paid under a retirement annuity contract to which Chapter 9 of Part 9 of ITEPA applies.
  • Other employment related annuities, which are chargeable as pensions by virtue of Section 609 to Section 611 of ITEPA.

Pensions and other payments excluded from pension income for tax credit purposes

The pensions and other payments listed below are to be disregarded as stated. These are non-taxable war pensions and any increase in pension payable as a result of injury on duty or a work-related illness.

  • A wounds pension or disability pension to the extent disregarded under S315(1) of ICTA 1988 (War Pension).
  • An annuity or additional pension payable to a holder of the Victoria Cross, George Cross or any other decoration mentioned in Section 317 of the Taxes Act 2001 (War pension).
  • The amount of a pension or allowance to which Section 318 of the Taxes Act 2001 applies that isn’t taxable by virtue of S318(2) of ICTA 1988 (War pension).
  • A pension or allowance by reason of payment of which a pension or allowance specified in Section 318(2) of ICTA 1988 is withheld or abated. The amount to be disregarded is the amount treated as falling within Section 318 by virtue of subsection (3) of that section (War pension).
  • In the case of a customer in receipt of a pension under the Service Pensions Order, any increase in the rate of that pension in respect of a dependant who is not a member of the customer’s family (War pension).
  • A mobility supplement, or a payment in respect of attendance, paid in conjunction with a war pension (War pension).
  • Any supplementary pension under Article 29(1A) of the Service Pensions Order (War pension).
  • A pension awarded at the supplementary rate under article 27(3) of the Personal Injuries (Civilians) Scheme 1983. The amount to be disregarded as income is the amount for the time being specified in paragraph 1(c) of Schedule 4 to the Scheme (currently £34.20 weekly) (War pension).
  • A pension awarded on retirement through disability caused by injury on duty or by a work related illness. The amount to be disregarded is the amount by which the pension exceeds what would have been payable if the retirement had been on grounds of ill health caused other than by an injury or illness.
  • Any lump sums paid by registered pension schemes which are exempt from income tax by virtue of Section 636A of ITEPA. These include lump sums payable on commencement of the retirement pension (below the tax free limit amount), refunds of excess member contributions, serious ill-health lump sums and some death benefit lump sums.
  • Any free coal or an allowance paid in lieu to a former miner or his widow are exempt from income tax by virtue of Section 646(1) of ITEPA.
  • Any payment in respect of contributions made under the payroll giving scheme by virtue of Section 713 of ITEPA.