House of Lords - Explanatory Note
Income Tax (Earnings And Pensions) Bill - continued          House of Lords

back to previous text

Clause 584: Taxable pension income

2346.     This clause 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 clause 567.

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

Clause 585: Person liable for tax

2348.     This clause 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.

Clause 586: Meaning of "retirement benefits scheme" etc.

2350.     This clause 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 clause 580.

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

Clause 587: Application to marine pilots' benefit fund

2357.     This clause 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.

Clause 588: Meaning of "employee" and "ex-spouse"

2360.     This clause 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.

Clause 589: Regulations

2363.     This clause 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.

Chapter 7: Former approved superannuation funds

Overview

2364.     This Chapter identifies the payments made by former approved superannuation funds that are charged to tax as pension income.

Clause 590: Annuities

2365.     This clause applies to annuities paid by former approved superannuation funds. It derives from section 608(4) of ICTA.

2366.     "Former approved superannuation fund" means an occupational pension scheme that was approved under section 208 of ICTA 1970. These schemes lost their approval in 1980 when the current code for retirement benefit schemes in Chapter 1 of Part 14 of ICTA took full effect. But section 608 of ICTA allows a scheme approved under section 208 of ICTA 1970 to remain exempt from income tax on its fund income provided two conditions are met. First, no further contributions are made into the scheme. Second, no changes are made to the scheme rules.

2367.     The clause uses the same language as clause 580 to identify the arrangements under which the annuities are paid.

Clause 591: Taxable pension income

2368.     This clause 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 clause 567.

2369.     The clause derives from section 608(4) of ICTA.

2370.     ICTA charges section 608(4) annuities under Schedule E. But they are not included in the list, in section 41 of FA 1989, of income that is taxed on the amount accruing in the tax year. The basis of assessment indicated in section 608(4) of ICTA is the annuity paid in the tax year. This clause makes that basis of charge clear.

Clause 592: Person liable for tax

2371.     This clause identifies the person chargeable. It is new.

2372.     ICTA taxes this income under Schedule E. It does not identify the person chargeable. This clause identifies the person liable for tax on annuities within clause 590 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Clause 593: Unauthorised payments: application of section 583

2373.     This clause applies to unauthorised payments from former approved superannuation funds. It derives from sections 599A(9) and 600 of ICTA.

2374.     Section 600(1) of ICTA imposes a charge on:

a payment made out of funds which are held for the purposes of a scheme which is approved for the purposes of -

this Chapter; .. or

(c) section 208 .. of the 1970 Act.

2375.     Schemes can no longer be approved under section 208 of ICTA 1970. The present tense, "is approved", was introduced into the opening paragraph of section 600 of ICTA by Schedule 6 of FA 1989. It is used because subsection (1)(a) of section 600 applies to retirement benefits schemes approved under Chapter 1 of Part 14 of ICTA (dealt with by clause 583 in Chapter 6 of this Part). But the charge on unauthorised payments still applies to schemes approved under section 208 ICTA 1970. That charge is rewritten in this clause so that this Chapter deals with all the charges on former approved superannuation funds.

2376.     The rules in section 600 of ICTA that apply to former approved superannuation funds are the same as those that apply to approved retirement benefits schemes. Rather than repeating those rules this clause applies clauses 583, 584, 585 and 588.

2377.     Subsection (1) identifies the payments to which clause 593 is applied. The payment must not be authorised by the rules of the fund or be made as a consequence of paragraph 33 of Schedule 6 to FA 1989. The effect of paragraph 33 of Schedule 6 to FA 1989 is discussed in paragraph 2342.

2378.     Subsection (2) prevents clause 593 applying if the payment has been taxed by clause 623 as a return of surplus funds from an additional voluntary contributions scheme. It derives from section 599A(9) of ICTA.

2379.     Subsection (3) clarifies the meaning of payment. It derives from section 600(4) of ICTA.

Clause 594: Meaning of "former approved superannuation fund"

2380.     This clause identifies the superannuation funds that are covered by this Chapter. It derives from section 608(1) of ICTA.

Chapter 8: Approved personal pension schemes

Overview

2381.     This Chapter identifies the payments made by approved personal pension schemes or arrangements that are taxed as pension income.

Clause 595: Annuities

2382.     This clause identifies annuities from approved personal pension schemes as pension income. It derives from section 648A of ICTA.

2383.     The effect of section 648A(1)(b) of ICTA is preserved by a consequential amendment to section 18(1)(b) of ICTA. This amendment ensures that an annuity taxed in the pension income Part is not also taxed under Schedule D.

2384.     Section 648A(2) of ICTA has not been rewritten as it is no longer needed. 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 Schedule D Case III. This is to give the payer time to set up a PAYE scheme. This power is no longer needed.

Clause 596: Taxable pension income

2385.     This clause 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 clause 567.

2386.     The clause is new. Tax is charged on the amount of the annuity received in the tax year. See Change 137 in Annex 1.

Clause 597: Person liable for tax

2387.     This clause identifies the person chargeable. It is new.

2388.     ICTA taxes this income under Schedule E. It does not identify the person chargeable. This clause identifies the person liable for tax on annuities within clause 595 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Clause 598: Income withdrawals

2389.     This clause identifies income withdrawals from approved personal pension arrangements as pension income. It derives from section 643(5) of ICTA.

Clause 599{j22344A: Taxable pension income

2390.     This clause 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 clause 567.

2391.     The clause derives from section 643(5) of ICTA. It makes it clear that tax is charged on the total of the income withdrawals made in the tax year.

Clause 600: Person liable for tax

2392.     This clause identifies the person chargeable. It is new.

2393.     ICTA taxes this income under Schedule E. It does not identify the person chargeable. This clause identifies the person liable for tax on income withdrawals within clause 598 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Clause 601: Unauthorised personal pension payments

2394.     This clause identifies unauthorised payments from personal pension schemes or arrangements as pension income. It derives from section 647 of ICTA.

2395.     Subsection (2) defines "personal pension payment". It derives from section 647(1) of ICTA.

2396.     Subsection (4) deals with the case in which the payment is made at a time when the scheme and the individual's arrangements are approved. It derives from section 647(2)(a) of ICTA. A payment that is not authorised by the scheme rules is taxable.

2397.     Subsection (5) deals with the case in which the payment is made at a time when the scheme is not approved. It derives from section 647(2)(b) of ICTA. A payment is taxable if it would not have been authorised by the rules of the scheme when the scheme was last approved.

2398.     Subsection (6) deals with the case in which the payment is made at a time when the arrangements are not approved. It derives from section 647(2)(b) of ICTA. A payment is taxable if it would not have been authorised by the arrangements when the arrangements were last approved.

2399.     Subsection (7) provides that "payment" includes non-cash payment. It derives from section 647(4) of ICTA.

Clause 602: Taxable pension income

2400.     This clause 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 clause 567.

2401.     The clause derives from section 647(3) of ICTA.

Clause 603: Person liable for tax

2402.     This clause identifies the person chargeable. It derives from section 647(3) of ICTA.

Clause 604: Meaning of "personal pension scheme" and related expressions

2403.     This clause cross-refers to various definitions and interpretations.

2404.     It derives from section 630(1) of ICTA.

2405.     The definition of "approved" in section 630(1) of ICTA is:

(a) in relation to a scheme (other than an approved retirement benefits scheme), means approved by the Board under this Chapter; and

(b) in relation to arrangements, means -

    (i) made in accordance with a scheme which is for the time being, and was when the arrangements were made, an approved scheme; or

    (ii) made in accordance with a scheme which is for the time being an approved converted scheme but which was, when the arrangements were made, an approved retirement benefits scheme

but does not refer to cases in which approval has been withdrawn.

2406.     The definition of "income withdrawal" in section 630(1) of ICTA is:

a payment of income, under arrangements made in accordance with a personal pension scheme, otherwise than by way of an annuity.

2407.     The definition of "personal pension arrangements" in section 630(1) of ICTA is:

arrangements made by an individual in accordance with a personal pension scheme.

2408.     The definition of "personal pension scheme" in section 630(1) of ICTA is:

a scheme whose sole purpose is the provision of annuities, income withdrawals or lump sums under arrangements made by individuals in accordance with the scheme.

Chapter 9: Retirement annuity contracts

Overview

2409.     This Chapter identifies annuities paid under a retirement annuity contract as pension income.

Clause 605: Annuities

2410.     This clause applies to annuities paid under a retirement annuity contract. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2411.     "Retirement annuity contract" is a widely understood term although it is not defined in ICTA. It means a contract that satisfies the conditions for relief set out in Chapter 3 of Part 14 of ICTA. It has not been possible to enter into such a new contract since 1988. But premiums and annuities will be paid under existing contracts for many years to come.

2412.     In ICTA there is no specific charge on annuities paid under retirement annuity contracts. The annuities are taxed by the ordinary rules of Schedule D Case III. The pension income Part creates a specific charge on annuities paid under retirement annuity contracts in the pension income Part for two reasons.

2413.     First, retirement annuity contracts remain an important source of retirement income for the self-employed.

2414.     Second, the specific charge will help to establish a clear boundary between those annuities that qualify for the relief given by section 656 of ICTA and those that do not. This point is particularly relevant for the purchased life annuities dealt with in Chapter 10. It is discussed in paragraphs 2425 and 2426 of the explanatory notes on that Chapter.

Clause 606: Meaning of "retirement annuity contract"

2415.     This clause defines "retirement annuity contract". It derives from sections 620, 621 and 622(3) of ICTA.

2416.     The term "retirement annuity contract" is not defined in ICTA or the Finance Acts. This clause introduces a definition based on the conditions under which the premiums qualify for tax relief.

2417.     Paragraph (a) applies to annuity contracts and trust schemes. It derives from sections 620 and 621 of ICTA. Section 620 applies to annuity contracts that have as their main object the payment of a retirement annuity to an individual. It also applies to trust schemes established to pay retirement annuities to an individual in an occupational group. Section 621 covers contracts to pay annuities to the spouse or dependant of the individual.

2418.     Paragraph (b) applies to substituted contracts. It derives from section 622(3) of ICTA. Section 622 is concerned with the option to apply the accrued benefits arising from a maturing contract in taking out another contract. It is no longer possible to exercise this option to create a new retirement annuity contract. But annuities are still paid under substituted contracts. So a reference to substituted contracts is needed in the definition of "retirement annuity contract".

Clause 607: Taxable pension income

2419.     This clause 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 clause 567.

2420.     It derives from section 64 of ICTA.

Clause 608: Person liable for tax

2421.     This clause identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 10: Other employment-related annuities

Overview

2422.     This Chapter identifies various purchased life annuities as pension income. It applies to purchased life annuities in the nature of pension income that are not identified in other Chapters of the pension income Part.

2423.     In ICTA there is no specific charge on the annuities included in this Chapter. They are taxed as annual payments under the ordinary rules of Schedule D Case III. There are two reasons for creating a specific charge on these annuities in the pension income Part.

2424.     First, the pension income Part should include all the income in the nature of pension income.

2425.     Second, it is the clearest way of dealing with sections 656 and 657 of ICTA.

2426.     A purchased annuity includes a payment of income and an element that in economic terms is the return of capital. Section 656 of ICTA exempts the capital element of an annuity payment from income tax. But this relief is not given to the annuities listed in section 657(2) of ICTA. Those annuities are:

  • annuities paid by the tax-advantaged schemes including those paid to give effect to pension sharing orders. The tax-advantaged schemes are approved retirement benefits schemes, approved personal pension schemes and retirement annuity contracts;

  • annuities in the nature of pension income other than those paid by the tax-advantaged schemes; and

  • annuities purchased in accordance with a direction in a will, or to provide for an annuity payable by virtue of a will or settlement out of income of property disposed of by the will or settlement.

2427.     This Chapter taxes the annuities described in the second bullet in paragraph 2426. Other Chapters of the pension income Part tax the annuities described in the first bullet. This will allow section 657 of ICTA to be rewritten so it applies only to the annuities in the third bullet.

Clause 609: Annuities for the benefit of dependants

2428.     This clause applies to annuities if their purchase qualified for relief under section 273 of ICTA. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2429.     Subsection (1) is new. It identifies the annuities as pension income.

2430.     Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the clause if the annuity is a foreign annuity. Foreign annuities are taxable only if paid to persons resident in the United Kingdom.

Clause 610: Annuities under sponsored superannuation schemes

2431.     This clause applies to an annuity purchased under a sponsored superannuation scheme. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2432.     Subsection (1) is new. It identifies the annuities to be taxed as pension income. To do this the clause has to describe the process under which the annuities are paid. It does this using the same language that clause 580 uses to identify annuities paid by approved retirement benefits schemes.

2433.     Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the clause if the annuity is a foreign annuity. Foreign annuities are taxable only if they are paid to persons resident in the United Kingdom.

2434.     Subsection (3) ensures there is no overlap with other clauses in the pension income Part. The definition of "sponsored superannuation scheme" in section 624(1) of ICTA predates the introduction of approved retirement benefits schemes in Chapter 1 of Part 14 of ICTA. An approved retirement benefits scheme is likely to be within the definition of "sponsored superannuation scheme". In ICTA an annuity paid by an approved retirement benefits scheme is taxed under Schedule E. The annuities identified in this clause are taxed under Schedule D. A Schedule E charge takes priority over a Schedule D charge. This subsection preserves that order of priority.

2435.     Subsection (4) defines "sponsored superannuation scheme". It cross-refers to section 624(1) of ICTA. The definition of "sponsored superannuation scheme" in section 624(1) of ICTA is as follows:

      'a sponsored superannuation scheme' means a scheme or arrangement -

    (a) relating to service in particular offices or employments, and

    (b) having for its object or one of its objects to make provision in respect of persons serving in those offices or employments against future retirement or partial retirement, against future termination of service through death or disability, or against similar matters,

    being a scheme or arrangement under which any part of the cost of the provision so made is or has been borne otherwise than by those persons by reason of their service (whether it is the cost or part of the cost of the benefits provided, or of paying premiums or other sums in order to provide those benefits, or of administering or instituting the scheme or arrangement).

Clause 611: Annuities in recognition of another's services

2436.     This clause applies to an annuity purchased by any person in recognition of another's services. It derives in part from section 18(1)(a)(i) of ICTA and in part is new.

2437.     Subsection (1) is new. It identifies the annuities to be taxed as pension income.

2438.     Subsection (2) derives from section 18(1)(a)(i) of ICTA. It limits the scope of the clause if the annuity is a foreign annuity. Foreign annuities are taxable only if they are paid to persons resident in the United Kingdom.

2439.     Subsection (3) ensures there is no overlap with other clauses in the pension income Part. An annuity paid by an approved retirement benefits scheme may be purchased in recognition of another's services. In ICTA an annuity paid by an approved retirement benefits scheme is taxed under Schedule E. The annuities identified in this clause are taxed under Schedule D. A Schedule E charge takes priority over a Schedule D charge. This subsection preserves that order of priority.

2440.     Subsection (4) gives the meaning of "office". It applies clause 5 in Part 2 (Employment Income: charge to tax).

Clause 612: Taxable pension income: UK annuities

2441.     This clause deals with the basis of assessment if the annuity arises from a source in the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in clause 567.

2442.     The clause derives from section 64 of ICTA.

Clause 613: Taxable pension income: foreign annuities

2443.     This clause deals with the basis of assessment if the annuity arises from a source outside the United Kingdom. It identifies the amount of taxable pension income, which feeds into the computation of net taxable pension income in clause 567.

2444.     The clause invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2445.     In ICTA the basis of assessment for a foreign pension is given by the rules of Schedule D Case V. The pension income Part does not repeat those rules but cross-refers the reader to them.

2446.     Subsection (4) makes it clear that the 10% deduction in section 65(2) of ICTA and the relief in section 585(2) of ICTA apply to these annuities. See Change 138 in Annex 1.

 
previous Section contents continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries index

© Parliamentary copyright 2003
Prepared: 17 February 2003