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Income Tax (Earnings and Pensions) Act 2003

Overview

2325.This Chapter identifies the payments made by approved retirement benefits schemes that are charged to tax as pension income.

Section 580: Pensions and annuities

2326.This section applies to pensions and annuities paid by an approved retirement benefits scheme.

2327.It derives from section 597 of ICTA.

2328.Paragraph (a) applies to pensions and annuities paid on retirement. It derives from section 597(1) of ICTA. The word “pension” in section 597(1) is subject to the interpretation rule in section 612(1) of ICTA that pension includes annuity. It also covers income drawdowns.

2329.Paragraph (b) derives from section 597(3) of ICTA, which deals with bought-out annuities. This paragraph applies to a number of annuities that are purchased through the operation of an approved retirement benefits scheme. For example, deferred annuities that satisfy the approval requirements in section 591(2)(g) of ICTA or annuities written on the winding-up of a scheme or to discharge a pension sharing order.

2330.It does not cover the case where a member of the scheme transfers the value of the benefits to an approved personal pension scheme and takes an annuity or income withdrawals from that scheme. Such an annuity or income withdrawal would be taxed by Chapter 8 of the pension income Part (Approved personal pension schemes).

2331.This section does not rewrite section 597(2) of ICTA. That provision is a transitional measure introduced when the basis of assessment switched from Schedule D Case III to Schedule E. It allows the Board to authorise the pension payer to continue to treat the annuity as if it were taxed under Schedule D Case III. This is to give the payer time to set up a PAYE scheme. This power is no longer needed.

2332.The section applies to all approved schemes as defined in section 586 including United Kingdom approved schemes operated by or on behalf of a foreign employer. There is no territorial restriction in section 597 of ICTA. So there is no territorial restriction on the operation of the section.

Section 581: Taxable pension income

2333.This section deals with the basis of assessment. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2334.The section derives from section 41 of FA 1989. That section provides that income taxed by section 597 of ICTA is charged on the amount accruing in the tax year. This means that the charge is calculated on the amount accruing from day to day without regard to when the income is actually paid.

Section 582: Person liable for tax

2335.This section identifies the person chargeable. It is new.

2336.In ICTA this income is taxed under Schedule E. It does not identify the person chargeable. The section identifies the person liable for tax on pensions and annuities within section 580 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Section 583: Unauthorised payments

2337.This section applies to unauthorised payments made by approved retirement benefits schemes. It derives from sections 599A(9) and 600 of ICTA.

2338.Subsection (2) prevents the section applying if the payment has been taxed by section 623 as a return of surplus funds from an additional voluntary contributions scheme. It derives from section 599A(9) of ICTA.

2339.Subsection (3)(a) identifies the type of scheme to which the section applies. It derives from section 600(1) of ICTA. The scheme must be approved when the unauthorised payment is made. The section applies to schemes approved under Chapter 1 of Part 14 of ICTA or its predecessor Chapter 2 of Part 2 of FA 1970.

2340.The pension income Part does not repeat the reference to schemes approved under Chapter 2 of Part 9 of ICTA 1970. These are former approved superannuation schemes that lost their approval in 1980. It is not necessary for this Act to rewrite the reference to these schemes.

2341.Paragraph (c) of section 600(1) of ICTA refers to schemes approved under section 208 of ICTA 1970. These are also former approved superannuation schemes that lost their approval in 1980. But they may still enjoy the advantages that come from approval if they satisfy the conditions in section 608 of ICTA. Section 608 has been rewritten in Chapter 7 of this Part (Former approved superannuation schemes). The charge on unauthorised payments made by those schemes is dealt with in that Chapter rather than here.

2342.Subsection (3)(b) gives the condition that the payment is not authorised by the scheme rules or made as a consequence of paragraph 33 of Schedule 6 to FA 1989. Paragraph 33 of Schedule 6 to FA 1989 applies to the return of employee additional voluntary contributions. It deems the rules of an additional voluntary contributions scheme to include a requirement to repay surplus funds whether or not such a payment is authorised by the scheme rules. The charge on the return of these funds is dealt with in Chapter 13 of this Part (Return of surplus additional voluntary contributions).

2343.Subsection (4) prevents the section applying to a pension or annuity. This avoids any overlaps with section 580.

2344.Subsection (6) prevents a double charge if the unauthorised payment is either a repayment of the employee’s contributions or a commutation of the pension. If these payments exceed the benefits authorised by the scheme rules this Chapter will tax them as unauthorised payments. Subsection (6) is needed to prevent the payments being taxed again by sections 598 or 599 of ICTA. Those provisions impose specific charges on the repayment of the employee’s contributions or the commutation of the pension. The regulations referred to in subsection (6) apply to superannuation funds approved before 6 April 1980. These regulations are not yet obsolete.

2345.Subsection (7) clarifies the meaning of “payment”. It derives from section 600(4) of ICTA.

Section 584: Taxable pension income

2346.This section sets out the basis of assessment for unauthorised payments. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in section 567.

2347.The section derives from sections 600(2) and (4) of ICTA.

Section 585: Person liable for tax

2348.This section identifies the person chargeable. It derives from section 600(2) of ICTA.

2349.The person liable for tax is the employee or the ex-spouse, no matter who received the payment.

Section 586: Meaning of “retirement benefits scheme” etc.

2350.This section invokes various definitions in ICTA.

2351.It derives from the interpretations in Chapter 1 of Part 14 of ICTA.

2352.Subsection (1) defines “retirement benefits scheme” and “approved”.

2353.“Retirement benefits scheme” is defined in section 611 of ICTA as follows:

In this Chapter “retirement benefits scheme” means, subject to the provisions of this section, a scheme for the provision of benefits consisting of or including relevant benefits, but does not include -

(a)

any national scheme providing such benefits; or

(b)

any scheme providing such benefits which is an approved personal pension scheme under Chapter IV of this Part.

2354.The definition of “approved” includes a reference to Chapter 2 of Part 2 of FA 1970. This is the legislation that introduced the new code for approved retirement benefits schemes. That code is now in Chapter 1 of Part 14 of ICTA.

2355.Subsection (2) deals with third party arrangements. It derives from section 612(2) of ICTA. It makes it clear that a pension or annuity paid through a third party is covered by section 580.

2356.Subsection (3) clarifies the meaning of “employer”. It derives from section 612(2A) of ICTA.

Section 587: Application to marine pilots’ benefit fund

2357.This section ensures that the provisions of Chapter 6 apply to a marine pilots’ benefit fund. It derives from section 607 of ICTA.

2358.The purpose of the legislation is to allow self-employed marine pilots to belong to an occupational pension scheme. Such membership would normally be available only to employees.

2359.One effect of the applying the provisions of Chapter 6 to a marine pilots’ benefit fund is that the Schedule D Case VI charge on unauthorised payments has been rewritten as a pension income charge. See Change 136 in Annex 1.

Section 588: Meaning of “employee” and “ex-spouse”

2360.This section clarifies the meaning of “employee” and defines the meaning of “ex-spouse”.

2361.Subsection (1) derives from the definition of “employee” in section 612(1) of ICTA and the definition of “ex-spouse” in section 659D of ICTA.

2362.Subsection (2) derives from the definition of “director” in section 612(1) of ICTA.

Section 589: Regulations

2363.This section allows the Board of Inland Revenue to make regulations for the administration of the charges identified in this Chapter. It derives from section 612(3) of ICTA.

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