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Session 2002 - 03
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Income Tax (Earnings And Pensions) Bill


 

These notes refer to the Income Tax (Earnings And Pensions) Bill
as brought from the House of Commons on 12th February 2003 [HL Bill 33]

INCOME TAX (EARNINGS AND PENSIONS) BILL


EXPLANATORY NOTES - VOLUME II

Part 9: Pension Income

Overview

2255.     This Part identifies the income that is taxed as pension income.

2256.     The Part charges income described as a pension in the source legislation. It also charges other income that is in the nature of pension income but is not described as a pension in the source legislation.

2257.     Different Chapters in the Part identify the various forms that pension income can take and set out the rules governing each form. For each category of income the Chapters specify the person liable to tax and the basis of the charge.

2258.     There is no statutory definition of "pension" for tax purposes, although voluntary pensions are specifically included. So "pension" has its ordinary meaning. That is a very wide meaning. The definition of "pension" fills almost three columns of the Oxford English Dictionary.

2259.     The Part sets out the exemptions that apply to income that would otherwise be chargeable. It also sets out the deductions that are allowed in calculating taxable pension income; payroll giving donations and the 10% deduction for certain overseas government pensions. The 10% deduction for foreign pensions is dealt with by cross-reference to section 65(2) of ICTA.

Chapter 1: Introduction

Overview

2260.     This Chapter sets out the structure of the pension income Part.

Clause 565: Structure of this Part

2261.     This is the only clause in the Chapter. It is new.

2262.     Chapter 2 imposes the charge and explains how exemptions and deductions are dealt with.

2263.     Chapters 3 to 15 identify:

  • what is chargeable - "pension income";

  • how to calculate the amount chargeable - "taxable pension income"; and

  • who is chargeable - the person liable for the tax.

2264.     Chapters 16 to 18 identify a number of exemptions. All the exemptions apply for all income tax purposes and not just for the purposes of this Part.

Chapter 2: Tax on pension income

Overview

2265.     This Chapter imposes the charge on "net taxable pension income" and explains how to calculate "net taxable pension income". There are four steps in the process:

  • ???Step one - identify the income as pension income;

  • ???Step two - exclude any exempt income;

  • ???Step three - calculate the amount of "taxable pension income"; and

  • ???Step four - calculate "net taxable pension income" by allowing certain deductions from "taxable pension income".

2266.     These steps are carried out for each source of pension income separately; see paragraph 2274.

2267.     The Chapter also includes a signpost to the various provisions that identify the person liable for any tax charged.

Clause 566: Nature of charge to tax on pension income and relevant definitions

2268.     This clause identifies the different forms of pension income that are chargeable. It is new.

2269.     "Pension income" is identified in subsection (2). Pension income includes not only pensions and annuities but other types of income that are in the nature of a pension. The types of pension income are listed in subsection (4). The length of the list reflects the variety of forms that pension income takes and the different ways in which those forms are treated for tax purposes.

2270.     Subsection (1) provides that the charge on "pension income" does not apply to any exempt income. "Exempt income" is defined in subsection (3) to mean any income that is exempted from income tax by one of the clauses in Chapters 16 to 18 of the pension income Part. This means that "exempt income" is included in the definition of "pension income" but is not taxed as pension income. This point is reinforced in clause 567(4). See paragraph 2276.

2271.     For example, clause 641 (wounds and disability pensions) gives an exemption to various types of war pension. Those pensions fall within the ordinary meaning of United Kingdom pension in clause 569 so they are included in "pension income" but because of the exemption they are not charged to tax.

Clause 567: Amount charged to tax

2272.     This clause imposes the charge to tax and explains how the charge is calculated. It is new.

2273.     Subsection (1) imposes the charge.

2274.     Subsection (2) provides that the charge is imposed on "net taxable pension income". Each pension, annuity or other item of pension income is treated separately in the calculation of net taxable pension income. So, if a taxpayer receives two occupational pensions, net taxable pension income is calculated for the income from each pension.

2275.     Subsection (4)(a) explains that the amount of "taxable pension income" is given in the relevant clause in Chapters 3 to 15. Each of those Chapters has a clause entitled "taxable pension income". Those clauses give the rules for calculating the amount of the "taxable pension income" for the income dealt with in the Chapter.

2276.     Subsection (4)(b) makes it clear that "taxable pension income" does not include any exempt income. The definition of "exempt income" is in clause 566(3).

Clause 568: Person liable for tax

2277.     This clause is a signpost to the clauses in Chapters 3 to 15 that identify the person liable to pay the tax charged. It is new.

Chapter 3: United Kingdom pensions: general rules

Overview

2278.     This Chapter applies to United Kingdom pensions.

Clause 569: United Kingdom pensions

2279.     This clause identifies pensions paid by or on behalf of a person who is in the United Kingdom as pension income. It derives from paragraph 3 of Schedule E (section 19(1) of ICTA) but it also covers payments taxed by paragraph 2 of Schedule E and section 133 of ICTA.

2280.     Subsection (1) applies to any pension paid by or on behalf of a person who is in the United Kingdom. It derives from paragraph 3 of Schedule E (section 19(1) of ICTA). The territorial scope in this clause is mirrored by clause 573 (in Chapter 4), which taxes foreign pensions. That clause applies to a pension paid by or on behalf of a person who is outside the United Kingdom. Together these two provisions ensure that all pensions paid by or to persons in the United Kingdom will be taxed.

2281.     Subsection (2) limits the scope of the clause. It applies only to pensions not identified by one of the specific provisions of the pension income Part. This gives the clause the character of a sweep-up provision. Normally a sweep-up provision would come after the specific provisions. But that would not be the right approach here.

2282.     One of the objectives of the pension income Part is to remove the overlap that exists in ICTA. Paragraph 3 of Schedule E (section 19(1) of ICTA) imposes a general charge on United Kingdom pensions. But there are also two provisions that impose a specific and overlapping charge on a United Kingdom pension. Section 597 of ICTA imposes a specific charge on pensions paid by approved retirement benefits schemes and paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on pensions paid by the Crown.

2283.     To remove any overlap the pension income Part needs to identify discrete forms of pension income. The general provision in clause 569 is subject to the clauses that identify specific forms of pension income. This results in the sweep-up nature of clause 569. But despite its sweep-up nature clause 569 will apply to many taxpayers. For example, nearly all public sector pensions will be within this clause. If the position of the clause in the Part is to reflect its importance it needs to come before the clauses that apply to specific types of pension income. Also, making the clause the first of the provisions that identify pension income gives a natural opening to the pension income Part. It is immediately obvious that all United Kingdom pensions are to be taxed.

2284.     Subsection (3) is a signpost to Chapter 4, which gives the general rules for foreign pensions. It is not possible for a pension to be a United Kingdom pension as defined in clause 569(1) and a foreign pension as defined in clause 573. This is because the qualifying conditions are mutually exclusive.

2285.     The pension income Part does not rewrite paragraph 2 of Schedule E (section 19(1) of ICTA). That provision applies to annuities, pensions and stipends payable by the Crown or out of the public revenue. All these forms of income will be taxed in the general charge on United Kingdom pensions in clause 569.

2286.     "Annuity" in paragraph 2 of Schedule E (section 19(1) of ICTA) is used in the sense of a regular income payment rather than a purchased annuity. Given the wide meaning of "pension" an annuity payable by the Crown is a pension. So it is not necessary for this Bill to rewrite a specific charge on annuities payable by the Crown.

2287.     The charge on annuities in paragraph 2 of Schedule E (section 19(1) of ICTA) does not apply to any annuity taxed by paragraph (c) of Schedule D Case III (section 18(3) of ICTA). As the pension income Part has not rewritten the charge on annuities in paragraph 2 of Schedule E the reference to paragraph (c) of Case III is redundant. So it is not necessary for this Bill to rewrite the reference to paragraph (c) of Schedule D Case III (section 18(3) of ICTA).

2288.     Paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on a pension payable by the Crown or out of the public revenue. The pension income Part does not retain this specific charge. Either the payment is a pension or it is not. The fact that the payment is made by the Crown cannot make it a pension. A pension paid by or on behalf of a person in the United Kingdom will be taxed by clause 569. It is not necessary for this Bill to rewrite the specific charge on a pension payable by the Crown or out of the public revenue.

2289.     Paragraph 2 of Schedule E (section 19(1) of ICTA) imposes a specific charge on a stipend payable by the Crown or out of the public revenue. A stipend paid by the Crown does not need particular identification. If a payment described as a stipend represents earnings as defined in clause 62 it will be taxed as employment income. If the payment described as a stipend is not earnings it will fall within the ordinary meaning of "pension". So it is not necessary for this Bill to rewrite the specific charge on a stipend payable by the Crown or out of the public revenue.

Clause 570: "Pension": interpretation

2290.     This clause ensures the charge applies to voluntary pensions. It derives from section 133(2) of ICTA.

2291.     The scope of section 133(2) of ICTA has been considered in two tax cases. In Johnson v Holleran [1988] 61 TC 433 and Johnson v Farquhar [1991] 64 TC 395 it was held that section 133(2) of ICTA applies for all the purposes of Schedule E and not merely for the purposes of section 133(1).

2292.     The effect of the clause is that any pension paid by or on behalf of a person in the United Kingdom will be taxed even if there is no contractual right to receive the pension.

Clause 571: Taxable pension income

2293.     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.

2294.     The clause derives from section 41 of FA 1989. That section provides that income taxed by paragraphs 2 and 3 of Schedule E (section 19(1) of ICTA) and 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 572: Person liable for tax

2295.     This clause identifies the person chargeable. It is new.

2296.     The pension income Part includes income that ICTA taxes under Schedule E and income that ICTA taxes under Schedule D. For income taxed under Schedule D section 59(1) of ICTA identifies the person chargeable as the person "receiving or entitled" to the income.

2297.     There is no equivalent of section 59(1) of ICTA for pensions that ICTA taxes under Schedule E. It would be inconsistent to identify a person chargeable for some but not all pension income. The pension income Part avoids this inconsistency. It makes the person liable for tax on pension income the person receiving or entitled to the income in all cases where ICTA did not specify the person chargeable. See Change 135 in Annex 1.

Chapter 4: Foreign Pensions: general rules

Overview

2298.     This Chapter applies to pensions paid by or on behalf of a person who is outside the United Kingdom.

Clause 573: Foreign pensions

2299.     This clause identifies pensions paid by or on behalf of a person who is outside the United Kingdom as pension income. Taken together with clause 569 this clause ensures that all pensions paid by or to persons in the United Kingdom are taxed. It derives from sections 18(3) and 58(1) of ICTA, both of which create a charge under Schedule D Case V.

2300.     Subsection (1) identifies the income that is within the clause. It includes the restriction that the clause applies only if the pension is paid to a person resident in the United Kingdom. As is the case for United Kingdom pensions there is no definition of "pension". The word has its ordinary meaning.

2301.     Subsection (2) limits the scope of the clause. The clause applies only to pensions not identified in one of the specific provisions of the pension income Part. This is a similar structure to clause 569 which covers pensions paid by or on behalf of a person who is in the United Kingdom. There are two reasons why the general charge on foreign pensions is subordinate to the specific charging provisions of the pension income Part.

2302.     First, as for United Kingdom pensions, each clause should identify a discrete source of pension income. To achieve this it is necessary to remove the overlap of the charging provisions in ICTA.

2303.     Second, there are two sorts of pension paid by or on behalf of a person who is outside the United Kingdom that ICTA taxes under Schedule E rather than Schedule D Case V. The pension income Part has to deal specifically with those pensions in order to maintain the effect of ICTA. The two sorts affected are those taxed by clause 580 (approved retirement benefits schemes) and clause 615 (certain overseas government pensions).

2304.     It is possible for an approved retirement benefits scheme to be operated by or on behalf of a person outside the United Kingdom. A pension or annuity paid by such a scheme is taxed by clause 580. The payer is obliged to operate PAYE. The 10% deduction in section 65(2) of ICTA is not available for these pensions.

2305.     Clause 615 applies to a pension paid in the United Kingdom by or on behalf of certain overseas governments for service to those governments. In practice these pensions are paid by the Crown Agents. The Crown Agents operate PAYE when paying the pensions.

2306.     Subsection (3) is a signpost to Chapter 3, which gives the general rules for United Kingdom pensions. It is not possible for a pension to be a foreign pension as defined in clause 573(1) and a United Kingdom pension as defined in clause 569(1). This is because the qualifying conditions are mutually exclusive.

Clause 574: "Pension": interpretation

2307.     This clause ensures the charge applies to voluntary pensions. It derives from section 58(2) of ICTA.

2308.     Subsection (1) identifies voluntary pensions using the same language that clause 570 uses to identify United Kingdom voluntary pensions. But the rules for foreign voluntary pensions are slightly different from the rules for United Kingdom voluntary pensions. For a foreign voluntary pension there is no equivalent of section 133(2) of ICTA (see paragraph 2290). A foreign pension paid on a voluntary basis will be taxable only if it meets the conditions in section 58(2) of ICTA.

2309.     Subsections (2) and (3) set out the conditions in section 58(2) of ICTA. The effect of the Interpretation Act 1978 is that the reference to "widow" in section 58(2)(b) of ICTA includes "widower". Subsection (2)(b) makes this effect explicit.

2310.     Subsection (4) gives the meaning of "office". It applies clause 5 in Part 2 (Employment Income: charge to tax).

Clause 575: Taxable pension income

2311.     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. The clause invokes sections 65, 68, 584 and 585 of ICTA. It is new.

2312.     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. The rules are in section 65 of ICTA and include the remittance basis. Section 65 is modified by the rules for Irish income in section 68 of ICTA. Sections 584 and 585 of ICTA are also relevant. Section 584 gives relief for income taxed on an arising basis if that income cannot be remitted to the United Kingdom. Section 585 gives relief for income taxed on a remittance basis if the remittances are delayed. There is a specific reference to retrospective payments of pension income in section 585(2) of ICTA.

Clause 576: Person liable for tax

2313.     This clause identifies the person chargeable. It derives from section 59(1) of ICTA.

Chapter 5: United Kingdom social security pensions

Overview

2314.     This Chapter identifies certain social security benefits as pension income. These are pensions that are paid in the form of social security benefits.

Clause 577: United Kingdom social security pensions

2315.     This clause identifies the six United Kingdom social security benefits taxed as pension income.

2316.     ICTA does not impose a specific charge on these social security benefits. They are taxed either by section 617 of ICTA as social security benefits or by paragraph 2 of Schedule E (section 19(1) of ICTA) as a pension.

2317.     The charge on industrial death benefit and graduated retirement benefit derives from paragraph 2 of Schedule E (section 19(1) of ICTA). The charge on the other benefits derives from section 617(1) of ICTA.

2318.     Subsection (2) describes each of the benefits by reference to the relevant provisions of the National Insurance Act 1965, the Social Security Contributions and Benefits Act 1992 and their Northern Ireland equivalents.

2319.     The subsection includes all three categories of state retirement pension. Category A pensions are paid in respect of a person's own contributions. Category B pensions are paid in respect the person's spouse's contributions. Category D pensions are payable to persons over 80 years of age who do not qualify for a Category A or B pension.

2320.     Subsection (3) clarifies which section 48 of the Northern Ireland Act is referred in subsection (2). The Social Security and Contributions (Northern Ireland) Act 1992 has two sections 48.

Clause 578: Taxable pension income

2321.     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.

2322.     The clause derives from section 41 of FA 1989. That section provides that income taxed by paragraph 3 of Schedule E (section 19(1) of ICTA) and section 617(1) 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 579: Person liable for tax

2323.     This clause identifies the person chargeable. It is new.

2324.     In ICTA this income is taxed under Schedule E. It does not identify the person chargeable. This clause identifies the person liable for tax on the benefits within Chapter 5 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Chapter 6: Approved retirement benefits schemes

Overview

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

Clause 580: Pensions and annuities

2326.     This clause 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 clause 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 clause applies to all approved schemes as defined in clause 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 clause.

Clause 581: Taxable pension income

2333.     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.

2334.     The clause 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.

Clause 582: Person liable for tax

2335.     This clause 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 clause identifies the person liable for tax on pensions and annuities within clause 580 as the person receiving or entitled to the income. See Change 135 in Annex 1.

Clause 583: Unauthorised payments

2337.     This clause 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 clause 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.

2339.     Subsection (3)(a) identifies the type of scheme to which the clause applies. It derives from section 600(1) of ICTA. The scheme must be approved when the unauthorised payment is made. The clause 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 Bill 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 clause applying to a pension or annuity. This avoids any overlaps with clause 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 6th April 1980. These regulations are not yet obsolete.

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

 
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Prepared: 17 February 2003