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Shame On All Of Us!

26 June 2002 / John T Newth
Issue: 3863 / Categories:

JOHN T NEWTH FCA, FTII, FIIT, ATT reminds readers that some income is exempt from taxation.

JOHN T NEWTH FCA, FTII, FIIT, ATT reminds readers that some income is exempt from taxation.

I WONDER IF you are conversant with section 315, Taxes Act 1988. I certainly wasn't until recently. It is headed 'Wounds and Disability Pensions' and exempts from tax wounds pensions granted to members of the naval, military or air forces of the Crown. In addition, the retired pay of disabled officers granted on account of medical unfitness attributable to or aggravated by naval, military or air force service is exempted.

Also exempted are disablement or disability pensions granted to members, other than commissioned officers, of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air force service.

The section goes on to exempt disablement pensions granted to the nursing services of the military bodies and certain injury and disablement pensions payable under legislation passed during the First World War. Where the whole of any retired pay or pension is not wholly attributable to disablement or disability, that part is exempt from tax.

A national scandal

Readers who have followed the national press during the past few months will by now have appreciated why I have highlighted this small section in the Taxes Acts. For very many years pensions paid under this section were treated as liable to tax, completely incorrectly.

It took a dogged and persistent campaign by a retired Royal Artillery officer, Major John Perry, to expose the situation and to force the Ministry of Defence and Government to accept his findings and put into operation means to redress the situation. It is understood that hundreds of ex-servicemen will benefit from the tenacity of Major Perry and that tax repayments of about £30 million will be made as a result. There is no doubt at all that in some instances it will be far too late, as the former member of the services concerned will have passed away and there will be no method of tracing his or her records. It is worth mentioning that Major Perry won the Butterworths Tolley Tax Award 2002 for the best contribution to the field of tax.

As the months have gone by, the exposure of the situation has become even worse. It started off with the Army and it now appears that the same situation applies to wounds and disability pensions paid by the Navy and Royal Air Force. In addition, the problem goes back for many more years than the Ministry of Defence at first admitted.

It would be easy to blame the Government and the Ministry of Defence alone. That would be quite wrong. The Inland Revenue is also to blame and so are the accounting and tax professions. How could this situation escape the consideration of tax advisers over so many years? I cannot recollect dealing with the affairs of someone receiving a wound or disability pension, but every one of us is responsible, both individually and corporately in the form of our professional bodies.

For this reason, I felt it right to highlight, briefly, the items that are exempt from income tax. Only a cursory reference to the various items can be made in an article of this nature and readers are encouraged to study Tolley's Income Tax 2001/02 at chapter 29 where the matter is dealt with in some detail. Chapter 59, paragraph 4 of the same book deals with exempt pensions and chapter 83, paragraph 4 the various benefits that are not taxable and which are received from the Department of Work and Pensions.

The main exemptions

  • Compensation for loss of employment, etc. up to £30,000. This applies to payments or benefits not otherwise chargeable to tax, but which come within the ambit of section 148, Taxes Act 1988. Any excess over £30,000 is taxable. This is a very brief summary of a complicated subject and readers should study both statutory and case law in much more detail when considering a particular case.
  • Individual savings accounts.
  • Interest on tax exempt special savings accounts opened before 6 April 1999.
  • The first £70 of interest for each individual from a national savings bank ordinary account.
  • Bonuses under save-as-you-earn linked to share option schemes.
  • Luncheon vouchers, provided they are non-transferable, used for meals only, are limited to 15 pence per working day and if limited in issue are available to lower paid staff. This is a farcical exemption by present day standards, as the figure of 15 pence has not been adjusted for very many years.
  • Personal equity plans taken out up to 5 April 1999.
  • Profit-related pay under a registered scheme, which is wholly or partly exempt within certain limits. (See Tolley's Income Tax, chapter 75 at paragraph 31.)
  • Redundancy payments under the Employment Rights Act 1996. These are taken into account for the purposes of section 148, Taxes Act 1988, but are otherwise exempt under Schedule E (see sections 579 to 580, Taxes Act 1988).
  • Wages in lieu of notice in some instances. (Again see section 148.)
  • Income support, when not paid to unemployed persons and strikers.
  • Working Families Tax Credit.
  • Short term benefits such as incapacity benefit (although not at the higher rate), maternity allowance and sickness benefit.
  • Of the other state benefits which are most common, attendance allowance, child benefit, the Christmas bonus for pensioners, disability living allowance and invalidity pension. It should be noted that invalid care allowance paid to carers is taxable, as of course are the retirement pensions, statutory maternity pay and statutory sick pay.
  • Foreign service allowance paid to a person in the service of the Crown (section 319, Taxes Act 1988).
  • Guaranteed income bonds. Annuities and annual payments under certain life insurance policies may be excluded from treatment as such. This is another exemption which needs careful study.
  • Housing grants, subject to certain exclusions (section 578, Taxes Act 1988).
  • Annual payments made under certain sickness policies. For detailed consideration of the provisions, please see sections 580A and 580B, Taxes Act 1988 and section 143, Finance Act 1996.
  • Interest (1) on certain United Kingdom Government stocks held by non-residents; (2) on Government savings certificates; (3) on overpaid inheritance tax (sections 233(3) and 235(2), Inheritance Tax Act 1984); (4) on repayment supplement in connection with overpaid tax.
  • Certain income is exempt from basic or lower rate income tax only (see chapter 28, paragraph 3 of Tolley's Income Tax).
  • Long service awards to employees, without limitations. This again needs to be studied in more detail.
  • Non-residents are exempt from tax on income and capital gains from a number of sources.
  • Certain overseas income under specific double taxation relief agreements.
  • Certain lump sums under personal pension, retirement annuities and retirement schemes. These provisions again need to be examined in detail.
  • Scholarship income and bursaries (section 331, Taxes Act 1988).

Less common exemptions

The following are examples of items which are less commonly encountered, but are also exempt income within the Taxes Acts.

  • Adoption allowances paid under the Adoption Allowance Regulations 1991 which would otherwise be regarded as annual payments within Schedule D, Case III (Revenue pamphlet IR1, A40).
  • Compensation for mis-sold pensions products (and interest thereon), including personal pensions, etc. (section 148, Finance Act 1996).
  • Damages and compensation for personal injury. This occurs where the damages are to consist wholly or partly of periodical payments or where a Court Order incorporates such terms.
  • Gallantry awards. This concerns annuities and additional pensions paid by virtue of holding the award to holders of the Victoria Cross or the George Cross, and other major military awards (section 317, Taxes Act 1988).
  • German and Austrian annuities and pensions for victims of Nazi persecution (section 330, Taxes Act 1988).
  • Certain income from international organisations (see chapter 24 of Tolley's Income Tax regarding diplomatic immunity).
  • Interest (1) on damages for personal injuries on death (section 329, Taxes Act 1988); (2) loan interest paid by its members to a credit union; (3) on refunds of amounts over-repaid by borrowers in respect of student loans made under specified statutory provisions; (4) by concession consisting of compensation payments paid on bank accounts owned by holocaust victims (Inland Revenue press releases 8 May 2000 and 30 April 2001).
  • Accommodation allowances and reimbursed costs relating to travel between the United Kingdom and any European institution paid to Members of Parliament or assemblies.
  • Miners' free coal or cash in lieu thereof.
  • Sandwich courses, where an employee is released by the employer to take a full-time educational course at a university, technical college or similar institution open to the public. This is subject to various conditions.
  • Discounts on Treasury securities issued after 6 March 1973 (this only applies to 1995-96 and earlier years).
  • War gratuities, bounties or gratuities to men and women voluntarily re-enlisting. Also training bounties to military reservists, mess and ration allowances, training expenses, allowances and efficiency bounties to members of reserve and auxiliary forces (section 316, Taxes Act 1988).
  • War widows' pensions (section 318, Taxes Act 1988).
  • Various pensions such as voluntary pensions not arising out of past employment or not paid by past employers or their successors. Also any pension awarded on retirement through disability caused to an employee on duty at work or by a work-related illness.
Exemption does not apply to such pensions paid out of approved exempt schemes. Pensions paid to a non-United Kingdom resident under certain legislation concerning India, Pakistan and Burma. Also pensions paid to non-United Kingdom residents under the Overseas Service Act 1958 from the Central African pension fund or Overseas Service pension fund (section 615(1)(2)(e to g), Taxes Act 1988.


Readers will no doubt want to remind me of items that I have omitted in this long list of exempt income. Nevertheless, both they and I will have been reminded of the very many sources of income which do not suffer United Kingdom income tax.

One way or another we need to make sure that what happened over the wound and disability pensions can never occur again in the United Kingdom.

Issue: 3863 / Categories:
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