EIM15055 | Employer-financed retirement benefits schemes: persons chargeable and residence rules

Section 394 ITEPA 2003

[Notice: the guidance on this page should be read with the notice at the top of EIM15015]

It is common for an employer-financed retirement benefits scheme to provide benefits for people other than an employee. The payment of a lump sum or pension to the surviving spouse of an employee who dies in service would be a typical example.

Where a ‘relevant benefit’ (see EIM15021) is paid out of an employer-financed retirement benefits scheme, if the recipient is an individual, the benefit counts as employment income of that individual under section 394(1) ITEPA 2003 (see EIM00512).

If the recipient is not an individual (for example, a company or club), the ‘responsible person’ is assessed to income tax under section 394(2) and (4) ITEPA 2003, at a rate of 45%. This rate applies to payments made since 6 April 2013. This figure was set by section 1(4) and (6) Finance Act 2012. Before that time the rate was 50%, effective from 6 April 2010, this time by virtue of article 2 SI 2010/536. Prior to that and with effect from 6 April 2003, the original rate was 40%. See EIM15056 for the definition of ‘responsible person’ and EIM15020 for the definition of ‘employer-financed retirement benefits scheme’.

The residence rules found in Chapters 4 and 5 Part 2 ITEPA 2003 (see EIM40001) do not apply to a charge under section 394 ITEPA 2003. That is because such a charge is classified as ‘specific employment income’ by section 7(4) ITEPA 2003 and those chapters are not applicable to such income (section 6(3) ITEPA 2003). A charge arises where there is either a person or a source of income in the UK. However, if the recipient is not resident in the UK tax relief may be due under the terms of any double taxation agreement between the UK and the country in which the recipient is resident.

For the year of assessment, see EIM15058.