EIM75800 - The taxation of pension income: voluntary annual payments
Overview
Sections 570 and 633 ITEPA 2003
Section 570 ITEPA 2003 provides that a pension that is paid by or on behalf of a person who is in the United Kingdom will be chargeable under section 569 ITEPA 2003 even if it is paid voluntarily or is capable of being discontinued (see EIM75200). A similar provision applies for the purposes of foreign pensions chargeable under section 573 ITEPA 2003 (see EIM75500).
Section 633 brings voluntary annual payments within the scope of taxable pension income. A payment that is voluntary or capable of being discontinued will be taxable as pension income if the payment is made to either:
- a former employee of office holder
- the widow, widower, civil partner, child, relative or dependant following the death of that former employee or office holder
The payment must be made by, or on behalf of, the person that employed the former employee (or under whom the office was held) or a successor of that person.
A payment is normally chargeable as pension income where it is one of a series of payments or gifts. Isolated gifts to former employees may be chargeable as employment income (see EIM00610) or in connection with the termination of employment (see EIM12800).
Taxable amount
Pension paid by or on behalf of someone in the UK
Section 634 ITEPA 2003
Where the pension is paid by or on behalf of someone who is in the UK, the taxable amount is the full amount of pension accruing in a tax year. This may be different from the amount actually paid in the tax year.
Income Taxable under section 634 falls within the definition of PAYE pension income. The pension payer should deduct and pay tax in accordance with the PAYE process. Detailed guidance on the operation of PAYE can be found in CWG2: further guide to PAYE and National Insurance contributions.
Foreign payments
Sections 633(4) and 635 ITEPA 2003
Where the pension is paid by or on behalf of someone outside the UK, the payment is subject to UK tax only if it is paid to a UK resident.
From 6 April 2017 the taxable amount is full amount of the payment arising in the tax year.
For payments arising before 6 April 2017 the taxable amount is 90% of the amount arising in the tax year.
Pension Income Taxable under section 635 is treated as ‘relevant foreign income’ for the purposes of chapters 2 and 3 of Part 8 ITTOIA 2005. For individuals subject to the remittance basis this means tax is due only on pension remitted to the UK. For pre-6 April 2017 payments the 10% deduction is not available for individuals subject to the remittance basis (see RDRM10430).