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

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Clause 614: Person liable for tax

2447.     This clause identifies the person chargeable for all the annuities in this Chapter. It derives from section 59(1) of ICTA.

Chapter 11: Certain overseas government pensions paid in the UK

Overview

2448.     This Chapter identifies certain pensions paid in respect of government service overseas as pension income.

Clause 615: Certain overseas government pensions paid in the United Kingdom

2449.     This clause derives from paragraph 4 of Schedule E (section 19(1) and section 133(2) of ICTA).

2450.     Paragraph 4 of Schedule E imposes a charge on certain pensions paid by or on behalf of overseas governments to United Kingdom residents. It refers to a "pension or annuity". As in paragraph 2 of Schedule E "annuity" is used here in the sense of a regular income payment rather than a purchased annuity. The word "pension" has a wide meaning. An annuity taxed by paragraph 4 of Schedule E is within that meaning. It is not necessary for this Bill to rewrite the reference to annuities.

2451.     Subsection (2) identifies the categories of person to whom the pension must be paid. The effect of the Interpretation Act 1978 is that "widow" includes "widower". The subsection incorporates this effect. The pension must be payable in respect of overseas government service.

2452.     Subsection (4) identifies the countries covered by the clause. It does this by reference to other legislation. In December 2002 the countries covered were:

    (a) A country which forms part of Her Majesty's dominions. These are:

    Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn, Henderson, Ducie and Oeno Islands, St Helena, St Helena Dependencies (Ascension Island, Tristan da Cunha), South Georgia and South Sandwich Islands, Turks and Caicos Islands.

    (b) Any other country mentioned in Schedule 3 of British Nationality Act 1981. These are:

    Antigua and Barbuda, Australia, The Bahamas, Bangladesh, Barbados, Belize, Botswana, Brunei, Canada, Republic of Cyprus, Dominica, Fiji, The Gambia, Ghana, Grenada, Guyana, India, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia, Maldives, Malta, Mauritius, Namibia, Nauru, New Zealand, Nigeria, Pakistan, Papua New Guinea, Saint Christopher and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa, Sri Lanka, Swaziland, Tanzania, Tonga, Trinidad and Tobago, Tuvalu, Uganda, Vanuatu, Western Samoa, Zambia, Zimbabwe.

    (c) Any territory under Her Majesty's protection. There are no such countries at present.

2453.     The clause does not identify the individual countries. This is because it would then be necessary to amend primary tax legislation to take account of any changes. A recent example is Hong Kong's change of status. The clause follows the pragmatic approach of ICTA.

2454.     Subsection (5) prevents the clause applying to payments made by the United Kingdom government. The phrase "public revenue of the United Kingdom" is retained because it has a settled technical meaning. It means a payment out of the United Kingdom Consolidated Fund. The reference to Northern Ireland is needed because there is also a Northern Ireland Consolidated Fund.

2455.     Subsection (6) defines "overseas government service". It derives from the definition of "relevant service" in paragraph 4 of Schedule E (section 19(1) of ICTA).

2456.     Subsection (7) derives from section 133(2) of ICTA. That section extends the charge on pensions taxed under Schedule E to voluntary pensions. Section 133(2) applies to these overseas government pensions if any are paid on a voluntary basis.

Clause 616: Taxable pension income

2457.     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.

2458.     It derives from section 41 of FA 1989. Section 41 charges pensions 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.

Clause 617 Deduction allowed from taxable pension income

2459.     This clause allows a deduction of 10% from the amount chargeable. It derives from section 196 of ICTA. The deduction feeds into the calculation of net taxable pension income in clause 567(3).

Clause 618: Person liable for tax

2460.     This clause identifies the person chargeable. It is new.

2461.     In ICTA this income is taxed under Schedule E. ICTA does not identify the person chargeable. This clause identifies the person liable for tax on pensions within clause 615 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 12: House of Commons Members' Fund

Overview

2462.     This Chapter identifies periodical payments granted out of the House of Commons Members' Fund as pension income.

Clause 619: The House of Commons Members' Fund

2463.     This clause derives from section 613(3) of ICTA.

2464.     The clause will apply to a very small number of taxpayers, possibly no more than 100. The House of Commons Members' Fund was established in 1939. It was superseded by the Parliamentary Contributory Pension Fund in 1964. The 1939 fund continues to make grants to former Members and their dependants. These grants are described as "periodical payments".

2465.     Paragraph (a) applies to grants made to former Members and their dependants who qualify for grants under the House of Commons Members' Fund Act 1939.

2466.     Paragraphs (b) and (c) apply to grants made to former Members and their dependants who receive grants under section 4 of the House of Commons Members Fund Act 1948 because they do not qualify under the 1939 Act. These payments are made from sums appropriated from the fund and the income earned on those appropriated amounts.

2467.     Section 613(1) and (2) of ICTA deal with Members' contributions to the fund. Because Members no longer pay these contributions it is not necessary for this Bill to rewrite section 613(1) and (2).

Clause 621: Taxable pension income

2468.     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.

2469.     The clause derives from section 613(3) of ICTA and makes it clear that tax is charged on the full amount paid in the tax year.

Clause 622: Person liable for tax

2470.     This clause identifies the person chargeable. It is new.

2471.     In ICTA this income is taxed under Schedule E. ICTA does not identify the person chargeable. This clause identifies the person liable for tax on payments within clause 619 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 13: Return of surplus employee additional voluntary contributions

Overview

2472.     Members of retirement benefits schemes can boost the pensions they will receive by making additional voluntary contributions (AVCs). They may make AVCs to their employer's scheme or to a separate "free-standing" AVCs scheme. If these schemes are "approved" by the Inland Revenue the member is entitled to tax relief on the payments and the investment income of the scheme is exempt. If a scheme does particularly well it is possible for the total benefits available to a member to exceed the maximum benefits permitted under the approval rules. The scheme administrator then has to return surplus AVCs to the member. In paying back the surplus the administrator has to deduct a special tax charge (see section 599A(2) of ICTA) designed to recover the tax relief in respect of both the AVCs and the investment income.

2473.     This Chapter is concerned with the treatment of the scheme member. If the scheme administrator has to return surplus AVCs the member is treated by section 595A(5) as having received the payment net of basic rate tax. This Chapter rewrites this charge as pension income. See Change 139 in Annex 1.

Clause 623: Return of surplus employee additional voluntary contributions

2474.     This clause identifies a return of surplus funds to a member of an exempt approved retirement benefits scheme or a relevant statutory scheme as pension income. It derives from sections 599A(1), (5), (9) and (10) of ICTA.

2475.     Subsection (4) requires the payment to be to or for the benefit of an employee. The meaning of "employee" is extended by section 612(1) of ICTA to include future and former employees. This is made clear in clause 628(1).

2476.     Section 599A(1) of ICTA applies to payments made to or for the benefit of employees or their personal representatives. But section 599A(5) of ICTA applies only to payments made to or for the benefit of employees. For this reason the clause makes no mention of personal representatives.

2477.     Subsection (5) prevents the payments also being taxed as a repayment of the employee's contributions or as a commutation of the pension. It derives from section 599A(9) of ICTA. The clause uses the same language as clause 583(6). The regulations referred to in subsection (3)(b) apply to superannuation funds approved before 6th April 1980. These regulations are not yet obsolete.

2478.     Section 599A(9) of ICTA gives this clause priority over any charge under section 600 of ICTA. That rule has been included in the rewrite of section 600 as clause 583(2).

Clause 624: Taxable pension income

2479.     This clause sets out 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.

2480.     It derives from section 599A(5). Tax is charged on the grossed up amount of the payments made in the tax year.

Clause 625: Person liable for tax

2481.     This clause identifies the person chargeable. It derives from section 599A(5) and (8) of ICTA.

Clause 627: Meaning of "grossing up"

2482.     This clause explains what is meant by "grossing up". It is new. Although the concept of grossing up is familiar it is not explained in ICTA.

Clause 628: Interpretation

2483.     This clause cross-refers to various definitions in ICTA. It derives from the interpretations given in Chapter 1 of Part 14 of ICTA.

2484.     Subsection (1) clarifies the meaning of "employee". It gives the meaning of "exempt approved scheme" and "relevant statutory scheme" by cross-reference.

2485.     "Exempt approved scheme" is defined in section 592(1) of ICTA as follows:

This section has effect as respects -

(a) any approved scheme which is shown to the satisfaction of the Board to be established under irrevocable trusts; or

(b) any other approved scheme as respects which the Board, having regard to any special circumstances, direct that this section shall apply;

and any scheme which is for the time being within paragraph (a) or (b) above is in this Chapter referred to as an 'exempt approved scheme'.

2486.     "Relevant statutory scheme" is defined in section 611A(1) of ICTA as follows:

In this Chapter any reference to a relevant statutory scheme is to -

(a) a statutory scheme established before 14th March 1989, or

(b) a statutory scheme established on or after that date and entered in the register maintained by the Board for the purposes of this section, or

(c) a parliamentary pension scheme.

2487.     Subsection (2) derives from the definition of "director" in section 612(1) of ICTA.

2488.     Subsection (3) derives from section 599A(10) of ICTA and the definition of employee in section 612(1) of ICTA.

2489.     Subsection (4) applies the definition of "office" in clause 5(3) in Part 2 (Employment Income: charge to tax).

Chapter 14: Pre-1973 pensions paid under the Overseas Pensions Act 1973

Overview

2490.     This Chapter identifies certain pensions paid since 6th April 1973 under the Overseas Pensions Act 1973 as pension income.

Clause 629: Pre-1973 pensions paid under the Overseas Pensions Act 1973

2491.     This clause derives from section 616(3) of ICTA.

2492.     Section 616(3) of ICTA was introduced to deal with a consequence of the Overseas Pensions Act 1973. Under the Overseas Pensions Act 1973 the United Kingdom government took responsibility for paying certain pensions previously paid by Commonwealth governments. This converted the pensions from foreign pensions taxed under Schedule D Case V to United Kingdom pensions taxed under Schedule E. This might have been to the taxpayer's disadvantage because the income could no longer be taxed on the remittance basis.

2493.     The effect of section 616(3) of ICTA is to treat the pensions as if they are still paid by the overseas government. To qualify the pension must have been paid since 6th April 1973 to the original pensioner, or to the original pensioner's widow or widower.

2494.     Subsection (1)(b) introduces the term "pre-1973 pension". That term is defined in clause 630.

2495.     Subsection (2) prevents the clause applying to any part of the pension that is paid under the Pensions (Increase) Act 1971. These increases to the pension have always been paid by the United Kingdom government and have always been taxed as United Kingdom pensions.

Clause 630: Interpretation

2496.     This clause defines various terms used in the Chapter. It derives from section 616(3) and (4) of ICTA.

2497.     Subsection (1) defines "original pensioner". It derives from section 616(4) of ICTA. The pensioner must be the person whose service earned the pension and he or she must have retired before 6 April 1973.

2498.     Subsection (2) defines "pre-1973 pension". The pension must have been paid since 6 April 1973 to the original pensioner or to the pensioner's widow or widower. The recipient must be resident in the United Kingdom.

Clause 631: Taxable pension income

2499.     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.

2500.     It derives from section 616(3) of ICTA and invokes sections 65 and 68 of ICTA.

2501.     Section 616(3) of ICTA treats the pension as if the original overseas government or body paid it. This clause adopts a different approach. The practical effect of section 616(3) is to tax the pension as a foreign pension. The clause legislates the practical effect.

2502.     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. There is no cross-reference to sections 584 and 585 of ICTA. These sections will not apply if the United Kingdom government pays the pensions.

Clause 632: Person liable for tax

2503.     This clause identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 15: Voluntary annual payments

Overview

2504.     This Chapter identifies voluntary annual payments as pension income.

Clause 633: Voluntary annual payments

2505.     This clause derives from sections 58(2) and 133(1) of ICTA.

2506.     Section 58 of ICTA imposes a charge on voluntary pensions and voluntary annual payments paid by or on behalf of a person outside the United Kingdom. Section 133 of ICTA imposes a charge on voluntary pensions and voluntary annual payments paid by or on behalf of a person in the United Kingdom. The charges on voluntary pensions have been rewritten in Chapters 3 and 4. These are the Chapters that deal with United Kingdom and foreign pensions generally. As voluntary annual payments are not pensions it is not appropriate to include them in Chapters that deal with pensions. So the charges on voluntary annual payments have been rewritten in a separate Chapter.

2507.     The conditions for the clause to apply are very similar to those that apply to foreign voluntary pensions. Those conditions have been rewritten in clause 574 and are repeated in this clause. The only difference is in subsection (4), which deals specifically with foreign voluntary annual payments. Subsection (4) restricts the charge to payments made to persons resident in the United Kingdom. This restriction is not needed in clause 574 because the same effect is achieved by clause 573.

Clause 634: Taxable pension income: UK voluntary annual payments

2508.     This clause is concerned with the basis of assessment if the annual payment is paid by or on behalf of a person who is 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.

2509.     The clause derives from section 41 of FA 1989. That section provides that income taxed by section 133 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.

Clause 635: Taxable pension income: foreign voluntary annual payments

2510.     This clause deals with the basis of assessment if the annual payment is paid by or on behalf of a person who is 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.

2511.     It invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2512.     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.

Clause 636: Person liable for tax

2513.     This clause identifies the person chargeable for both United Kingdom and foreign source payments.

2514.     For a payment made by or on behalf of a person who is in the United Kingdom the clause is new. ICTA taxes this income under Schedule E. It does not identify the person chargeable. The clause identifies the person liable for tax on annual payments within clause 633 as the person receiving or entitled to the income. See Change 135 in Annex 1.

2515.     For a payment made by or on behalf of a person who is outside the United Kingdom the clause is derived from section 59(1) of ICTA.

Chapter 16: Exemption for certain lump sums

Overview

2516.     This Chapter is concerned with lump sums paid under tax-advantaged pension schemes.

Clause 637: Exemption for lump sums provided under certain pension schemes etc.

2517.     This clause exempts lump sums paid under tax-advantaged pension schemes from income tax. It derives from section 189 of ICTA.

2518.     A lump sum is not a pension. The exemption is included in the pension income Part because the payment of lump sums is a feature of many pension schemes.

2519.     Subsection (1) provides the exemption. Section 620(3) of ICTA allows the Board of Inland Revenue to approve a retirement annuity contract that pays a lump sum in specified circumstances. These lump sums have always been considered to be tax-free. The clause makes this clear by including these payments in the exemption. See Change 140 in Annex 1.

2520.     Subsection (2) limits the scope of the exemption. The exemption applies only if:

  • the payment has been earned; or

  • the taxpayer has lost his or her job or has suffered a loss of earnings and either event is due to ill health.

2521.     This limitation is intended to prevent "golden handshakes" being paid as exempt lump sums.

2522.     Subsection (4) limits the exemption given to lump sum payments made under retirement annuity contracts to payments that satisfy the conditions for approval in section 620(3) of ICTA.

2523.     Subsection (5) defines and clarifies various terms used in the clause. In part it is new and in part it derives from Part XIV of ICTA.

2524.     "Approved personal pension arrangements" derives from section 630(1) of ICTA.

2525.     "Personal pension arrangements" is defined in section 630(1) of ICTA as follows:

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

2526.     "Approved" in relation to personal pension arrangements is defined in section 630(1) of ICTA as follows:

(i) [arrangements] 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.

2527.     The definition of "office" applies clause 5 in Part 2 (Employment income: charge to tax).

2528.     Subsection (6) defines "tax-exempt pension scheme". A scheme described in section 221(1) and (2) of ICTA 1970 is a former approved superannuation scheme. These schemes lost their approval in April 1980. But it is still possible for such a scheme to pay a lump sum and so the reference to these schemes is not obsolete.

2529.     Subsection (7) defines "relevant statutory scheme", "retirement benefits scheme" and, in relation to retirement benefits schemes, "approved".

2530.     Section 611A(1) of ICTA gives the meaning of "relevant statutory scheme" as follows:

(a) a statutory scheme established before 14th March 1989, or

(b) a statutory scheme established on or after that date and entered in the register maintained by the Board for the purposes of this section, or

(c) a parliamentary pension scheme.

2531.     Section 611(1) of ICTA gives the meaning of "retirement benefits scheme" as follows:

'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.

Chapter 17: Exemptions: any taxpayer

Overview

2532.     This Chapter exempts various pensions from any charge to income tax. The exemption applies whether or not the taxpayer is resident in the United Kingdom.

2533.     Four of the provisions rewritten in this Chapter, sections 315, 318, 330 and 617 of ICTA, provide that the "income shall not be treated as income for any income tax purpose". Either they use that phrase or a very similar form of words. Section 317 of ICTA, rewritten as clause 638, provides that the income "shall be disregarded for all the purposes of the Income Tax Acts".

2534.     In order to make the exemptions simple and consistent the phrase "no liability to income tax arises" is used throughout the Bill to express exemption from tax. See Note 28 in Annex 2.

Clause 638: Awards for bravery

2535.     This clause exempts pensions and annuities paid to holders of various awards for bravery. It derives from section 317 of ICTA.

Clause 639: Pensions in respect of death due to military or war service

2536.     This clause exempts pensions and allowances paid on death due to service in the armed forces, wartime service in the merchant navy or war injuries. It derives from section 318 of ICTA.

2537.     Paragraph (a) applies to pensions and allowances paid in respect of both civilians and members of the armed forces. It derives from section 318(2)(a) of ICTA. Section 318(2) identifies the exempted pensions in general terms. This avoids the need to identify the specific schemes under which the pensions are paid. The clause follows the pragmatic approach of section 318(2). This is because the pensions are paid under a range of schemes. It avoids the need to amend primary tax legislation every time a new scheme is introduced.

2538.     Paragraph (b) applies to pensions and allowances paid in respect of members of the armed forces who died in peacetime service before the 1939-1945 war. It derives from section 318(2)(b) of ICTA.

2539.     Paragraph (c) applies to pensions and allowances paid by countries outside the United Kingdom. It derives from section 318(2)(c) of ICTA.

 
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Prepared: 17 February 2003