EIM75200 - The taxation of pension income: UK pensions

Overview
UK pensions chargeable under section 569
What is not taxable under section 569
Amount of pension income subject to tax
Treatment of pension income whilst temporarily non-resident
Application of PAYE

Overview

United Kingdom pension income may consist of pensions, annuities and certain lump sums paid by or on behalf of a person who is in the UK. Tax is due on UK pension income paid to a UK or a non-UK resident. Different types of UK pension income may be chargeable under different sections of ITEPA 2003:

  • UK social security pensions – see EIM75700
  • payments of pension and lump sums from a registered pension scheme – see EIM75400
  • employment-related annuities – EIM75300 provides guidance on the tax treatment of these annuities
  • payments under the House of Commons Member’s Fund – see EIM75900
  • voluntary annual payments – see EIM75800
  • any other type of UK pension income is chargeable under section 569 ITEPA 2003 - see the next section

UK pensions chargeable under section 569

Section 569 ITEPA 2003

A pension paid by, or on behalf of, a person or pension provider who is in the United Kingdom is chargeable under section 569, unless it is covered by one of the other charging provisions in Part 9 ITEPA 2003.

Pensions taxable under section 569 include pensions payable by the Crown. Annuities paid by the Crown generally have the character of pensions and will therefore be taxable under section 569. Examples are:

  • pensions paid to certain seamen under the Greenwich Hospital Act 1865
  • life annuities paid to certain farmers who have given up uncommercial holdings of land under the Agriculture Act 1967

Voluntary pensions

Sections 569 and 570 ITEPA 2003

Any pension which is voluntary or capable of being discontinued is chargeable under section 569.

Isolated gifts to former employees are unlikely to be pension income. However, they could possibly be chargeable as employment income either as general earnings or because they are in connection with the termination of the employment (see EIM00610 and EIM12805 onwards).

For guidance on voluntary annual payments see EIM75800.

What is not taxable under section 569

Section 569 is a default section in that it charges to tax UK source pension income that is not chargeable under the other chapters of Part 9 ITEPA 2003. Pension income that is not chargeable under section 569 includes:

  • payments from registered pension schemes (including payments from all types of pre-6 April 2006 approved pension arrangements that became registered pension schemes on 6 April 2006), taxable under chapter 5A – see EIM75400
  • annuities paid under, or purchased with sums or assets held for the purposes of, a registered pension scheme, taxable as pension under a registered pension scheme – see EIM75400
  • other employment-related annuities, taxable under Chapter 10 – see EIM75300
  • pensions paid by certain foreign governments in the United Kingdom that are taxable under Chapter 11 – see EIM75500
  • social security pensions, taxable under Chapter 5 – see EIM75700
  • pensions arising from sources outside the United Kingdom – see EIM75500
  • payments from the House of Commons Member Fund – see EIM75900

This is not an exhaustive list.

Amount of pension income subject to tax

Sections 571 and 572 ITEPA 2003

The person who receives or is entitled to receive the pension is liable to pay the tax due on the pension income. This includes people who are non-UK resident as well as UK residents. Where a pension is paid to a non-resident, they may be able to make a claim for double taxation exemption or relief – see EIM75070.

The amount of pension income that is subject to tax in a tax year is the full amount of the pension accrued, regardless of whether the pension was paid in that tax year.

The pension income that should be assessed to tax is the amount the pensioner is entitled to in the tax year. Note that this includes any amount treated as accruing in a tax year following a period of temporary non-residence in accordance with section 572A ITEPA - see Treatment of pension income whilst temporarily non-resident below for more information.

Pensioners are often content to pay Income Tax on the amount received in a year, as in most years the amounts accruing and received are similar. However, it is possible in certain circumstances for the amounts to be different – see EIM75020.

Treatment of pension income whilst temporarily non-resident

Section 572A ITEPA 2003

When an individual returns to the UK after a period of temporary non-residence they may be charged to tax on income paid during the period of temporary non-residence. This will happen in respect of certain lump sum payments that are taxable under section 569 where all the following conditions are met:

  • the individual left the UK on or after 6 April 2013
  • during the period of temporary non-residence they accrued a lump sum payment that would be chargeable under section 569 ITEPA 2003
  • the payment is not chargeable under section 569 because of the operation of a double taxation agreement (DTA); for this purpose, the payment is treated as not being chargeable under section 569 due to a DTA even where no claim has been made under the terms of the DTA

Where all the conditions are met the lump sum payment is treated as accruing in the period of return.

The section of the Residence, Domicile and Remittance Basis Manual starting at RDRM12600 provides guidance on the general temporary non-residence rules. For guidance on the meaning of:

Application of PAYE

Section 683 ITEPA 2003

Section 683 ITEPA defines ‘PAYE pension income’, which is pension income that is subject to the PAYE system and rules. Pensions taxable under section 569 ITEPA 2003 are included in the definition of ‘PAYE pension income’, so the PAYE system applies to these pensions.

However, the PAYE system does not apply to the amount of pension subject to tax because of the operation of the temporary non-residence rule at section 572A ITEPA 2003 – see Treatment of pension income whilst temporarily non-resident. Section 683(3B) specifically excludes this amount from the definition of ‘PAYE pension income’. As the pension becomes chargeable at a point later than when the pension is actually paid it would be impossible to operate PAYE correctly on such payments.