Chapter EIM65870

Published date22 May 2014
Record NumberEIM65870
CourtHM Revenue & Customs

This guidance deals with the tax treatment of terminal gratuities made since 6 July 1995 for non- pensionable service under the Local Government Superannuation (Gratuities) Regulations 1995 (SI 1995/1497) and the Local Government (Discretionary Payments) Regulations 1996 (SI 1996/1680).

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

The regulations allow local authorities, at their discretion, to pay lump sum gratuities on termination of employment to employees who have not been members of the Local Government Superannuation Scheme for the whole or part of their service.

Under these regulations, lump sum gratuities may be made under separate schemes for redundancy, death in service and retirement. Deal with them as follows:

  • Redundancy lump sum: chargeable under Section 401 ITEPA 2003 (see EIM13750)

  • Retirement lump sums where the scheme under which the payments are made was approved by HMRC before 6 April 2006 so the scheme automatically became a registered pension scheme (see EIM74014) on 6 April 2006: Provided no benefits are paid in relation to service after 5 April 2006, any lump sum is exempt from tax.
  • Retirement lump sums where the scheme covers post 5 April 2006 service or the scheme was not approved before 6 April 2006 but became a registered pension scheme on or after that date: the maximum tax exempt retirement lump sum payable is 25% of the amount of the gratuity awarded. The remaining 75% has to be used to provide a pension but this amount may be commuted to a lump sum taxed at the individual’s marginal rate...

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