What does section 354 of the Income Tax (Earnings and Pensions) Act 2003 do?

Section 354 prevents expense deductions relating to one category of employment earnings from being offset against earnings taxed on a different basis. It ensures that expenses connected with duties giving rise to receipt-basis earnings cannot reduce remittance-basis earnings, and vice versa, maintaining proper matching of relief to the correct earnings category.

Can expenses for overseas duties be deducted from UK earnings taxed on receipt?

No. Under section 354, expenses relating to duties connected with overseas earnings taxed on the remittance basis cannot be deducted from UK earnings taxed on receipt. Those expenses may only be considered against remittance-basis earnings under section 353, ensuring expense relief matches the correct earnings category under United Kingdom law.

Does section 354 change the rules on whether an expense qualifies for deduction?

No. Section 354 is to be disregarded when applying the general deductibility provisions under sections 336 to 342. It operates purely as a restriction on which category of earnings an otherwise allowable deduction may be set against. It does not alter the fundamental tests for whether an expense qualifies for deduction.

How does section 354 apply to employees with both receipt-basis and remittance-basis earnings?

If an employee has both receipt-basis and remittance-basis earnings in the same tax year, section 354 prohibits cross-category expense relief. Expenses for duties generating receipt-basis earnings can only reduce those earnings under sections 336 to 342, and expenses for remittance-basis duties can only reduce those earnings under section 353.

Income Tax (Earnings and Pensions) Act 2003 section 354

Disallowance of expenses relating to earnings taxed on different basis or untaxed

Section 354 prevents expense deductions relating to one category of earnings from being set against earnings that are taxed on a different basis or are not subject to income tax at all.

Where employment earnings for a tax year include both earnings taxed on receipt and other earnings (excluding those under section 22), no deduction under sections 336 to 342 may be claimed against the receipt-basis earnings for expenses relating to duties connected with the other earnings.
Where employment earnings include both earnings taxed on the remittance basis under section 26 and other earnings, no deduction under section 353 may be claimed against the remittance-basis earnings for expenses relating to duties connected with the other earnings.
The restriction ensures that expense relief is matched to the correct category of earnings rather than being offset against earnings taxed under a different regime.
Section 354 itself is to be disregarded for the purposes of the general deductibility provisions, meaning it does not alter the underlying rules on what expenses qualify for deduction.

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