Income Tax (Earnings and Pensions) Act 2003 section 397

Certain lump sums: calculation of amount taxed by virtue of section 394

Section 397 provides a method for reducing the taxable amount of certain lump sums paid from non-approved pension schemes, where some of the scheme's investment profits have not already been subject to income tax.

• A deduction from the taxable lump sum is available where scheme investment profits have not been charged to tax and the relevant conditions are met
• The deduction equals the total of the employee's own contributions plus any employer contributions already taxed on the employee, but this is subject to reduction where further lump sum payments are expected
• Where further lump sums may be payable to the employee, their dependants, or other connected persons, a formula apportions the deduction to reflect only the current payment's share of the total expected benefits
• No double deductions are permitted, and the fact that scheme funds may have suffered a tax charge on cessation of scheme approval does not count as having been brought into charge to income tax for these purposes