Clarification has been issued in an HMRC statement about the taxation of ex-gratia payments made to employees in the event of retirement or death. The tax rules have changed significantly since the start of the new registered pensions regime in April 2006.

Prior to April 2006, ex-gratia awards made on termination of an office or employment due to retirement or death were payable tax-free, if the procedure set out in Statement of Practice 13/91 was followed. Application had to be made to HMRC Audit and Pension Scheme Services (APSS) and approval would only be given if no other lump sum benefit from an approved or statutory retirement benefits scheme was payable and the total payment, including gifts in kind, did not exceed 1/12th of the annual pensions cap, i.e. £8,800 for the 2005/06 tax year.

This procedure ceased to apply from 6 April 2006. From that date,

• if a lump sum payment is the only benefit provided by a registered pension scheme, i.e. no associated pension is payable, the payment is taxable as an unauthorised payment (paid over by the scheme administrator and reported under self-assessment by the recipient)
  
  
• an arrangement established on or after 6 April 2006 to make ex-gratia payments on retirement or death is an Employer-Financed Retirement Benefits Scheme (EFRBS) and, as such, the benefits provided are taxable in full under PAYE.

Benefits from an EFRBS are only excluded from a tax charge if they are:

• benefits in respect of ill-health or disablement of an employee during service
  
  
• benefits in respect of the death by accident of an employee during service
  
  
• benefits in respect of an employee's non-accidental death in service and payment of which is already provided for under the rules of the scheme on 6 April 2006
  
  
• benefits under a group life policy or certain prescribed individual life policies.

...UK Payroll News - Latest

Sources:
Withdrawal of Statement of Practice SP13/91
Registered Pension Scheme Manual RPSM04104510 - Technical Pages: Taxation: Unauthorised payments: Unauthorised payments charge
Employment Income Manual page EIM15210 - Non-approved and employer-financed retirement benefits schemes: payer's responsibilities: operation of PAYE

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