Income Tax (Earnings and Pensions) Act 2003 section 407

Exception for payments and benefits under tax-exempt pension schemes

Section 407 provides an exception from the termination payments tax charge for certain payments or benefits made through tax-exempt pension schemes.

• Payments or benefits from tax-exempt pension schemes are exempt if they compensate for loss of employment or for loss or reduction of earnings due to ill health
• Payments or benefits properly regarded as earned by past service (such as commutation payments calculated by reference to past service) are also exempt
• Tax-exempt pension schemes include registered pension schemes, overseas government employee schemes, and certain legacy schemes recognised under earlier legislation
• Where this exception applies, the termination payments and benefits tax rules in the wider chapter do not apply to the payment or benefit in question