Income Tax (Earnings and Pensions) Act 2003 (c. 1)

An Act to restate, with minor changes, certain enactments relating to income tax on employment income, pension income and social security income; and for connected purposes.

[6th March 2003]

Be it enacted by the Queen's most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:--

Part 1 Overview

1 Overview of contents of this Act

(1) This Act imposes charges to income tax on--

(a) employment income (see Parts 2 to 7),

(b) pension income (see Part 9), and

(2) Those charges to tax have effect for the purposes of section 1(1) of ICTA (the general charge to income tax).

(3) This Act also--

(a) confers certain reliefs in respect of liabilities of former employees (see Part 8),

(b) provides for the assessment, collection and recovery of income tax in respect of employment, pension or social security income that is PAYE income (see Part 11), and

2 Abbreviations and general index in Schedule 1

(1) Schedule 1 (abbreviations and defined expressions) applies for the purposes of this Act.

(2) In Schedule 1--

(a) Part 1 gives the meaning of the abbreviated references to Acts and instruments used in this Act, and

(b) Part 2 lists the places where expressions used in this Act are defined or otherwise explained.

(3) Part 2 of Schedule 1 does not apply to expressions used in Chapters 6 to 9 of Part 7 (share incentive plans and other arrangements for acquiring shares): separate indexes relating to these Chapters appear at the end of Schedules 2 to 5.

Part 2 Employment income: charge to tax

Chapter 1 Introduction

3 Structure of employment income Parts

(1) The structure of the employment income Parts is as follows--

this Part imposes the charge to tax on employment income, and sets out--
- (a) how the amount charged to tax for a tax year is to be calculated, and
- (b) who is liable for the tax charged;
Part 3 sets out what are earnings and provides for amounts to be treated as earnings;
Part 4 deals with exemptions from the charge to tax under this Part (and, in some cases, from other charges to tax);
Part 5 deals with deductions from taxable earnings;
Part 6 deals with employment income other than earnings or share-related income; and
Part 7 deals with share-related income and exemptions.

(2) In this Act "the employment income Parts" means this Part and Parts 3 to 7.

4 "Employment" for the purposes of the employment income Parts

(1) In the employment income Parts "employment" includes in particular--

(a) any employment under a contract of service,

(b) any employment under a contract of apprenticeship, and

(2) In those Parts "employed", "employee" and "employer" have corresponding meanings.

5 Application to offices and office-holders

(1) The provisions of the employment income Parts that are expressed to apply to employments apply equally to offices, unless otherwise indicated.

(2) In those provisions as they apply to an office--

(a) references to being employed are to being the holder of the office;

(b) "employee" means the office-holder;

(3) In the employment income Parts "office" includes in particular any position which has an existence independent of the person who holds it and may be filled by successive holders.

Chapter 2 Tax on employment income

6 Nature of charge to tax on employment income

(1) The charge to tax on employment income under this Part is a charge to tax on--

(a) general earnings, and

(b) specific employment income.

The meaning of "employment income", "general earnings" and "specific employment income" is given in section 7.

(2) The amount of general earnings or specific employment income which is charged to tax in a particular tax year is set out in section 9.

(3) The rules in Chapters 4 and 5 of this Part, which are concerned with--

(a) the residence and domicile of an employee in a tax year, and

(b) the tax year in which amounts are received or remitted to the United Kingdom,

apply for the purposes of the charge to tax on general earnings but not that on specific employment income.

(4) The person who is liable for any tax charged on employment income is set out in section 13.

(5) Employment income is not charged to tax under this Part if it is within the charge to tax under Case I of Schedule D by virtue of section 314(1) of ICTA (divers and diving supervisors).

7 Meaning of "employment income", "general earnings" and "specific employment income"

(1) This section gives the meaning for the purposes of the Tax Acts of "employment income", "general earnings" and "specific employment income".

(2) "Employment income" means--

(a) earnings within Chapter 1 of Part 3,

(b) any amount treated as earnings (see subsection (5)), or

(3) "General earnings" means--

(a) earnings within Chapter 1 of Part 3, or

(b) any amount treated as earnings (see subsection (5)),

excluding in each case any exempt income.

(4) "Specific employment income" means any amount which counts as employment income (see subsection (6)), excluding any exempt income.

(5) Subsection (2)(b) or (3)(b) refers to any amount treated as earnings under--

(a) Chapters 7 and 8 of this Part (application of provisions to agency workers and workers under arrangements made by intermediaries),

(b) Chapters 2 to 11 of Part 3 (the benefits code),

(d) section 262 of CAA 2001 (balancing charges to be given effect by treating them as earnings).

(6) Subsection (2)(c) or (4) refers to any amount which counts as employment income by virtue of--

(a) Part 6 (income which is not earnings or share-related),

(b) Part 7 (share-related income and exemptions), or

8 Meaning of "exempt income"

For the purposes of the employment income Parts, an amount of employment income within paragraph (a), (b) or (c) of section 7(2) is "exempt income" if, as a result of any exemption in Part 4 or elsewhere, no liability to income tax arises in respect of it as such an amount.

Chapter 3 Operation of tax charge

9 Amount of employment income charged to tax

(1) The amount of employment income which is charged to tax under this Part for a particular tax year is as follows.

(2) In the case of general earnings, the amount charged is the net taxable earnings from an employment in the year.

(3) That amount is calculated under section 11 by reference to any taxable earnings from the employment in the year (see section 10(2)).

(4) In the case of specific employment income, the amount charged is the net taxable specific income from an employment for the year.

(5) That amount is calculated under section 12 by reference to any taxable specific income from the employment for the year (see section 10(3)).

(6) Accordingly, no amount of employment income is charged to tax under this Part for a particular tax year unless--

(a) in the case of general earnings, they are taxable earnings from an employment in that year, or

(b) in the case of specific employment income, it is taxable specific income from an employment for that year.

10 Meaning of "taxable earnings" and "taxable specific income"

(1) This section explains what is meant by "taxable earnings" and "taxable specific income" in the employment income Parts.

(2) "Taxable earnings" from an employment in a tax year are to be determined in accordance with--

(a) Chapter 4 of this Part (rules applying to employees resident, ordinarily resident and domiciled in the UK), or

(b) Chapter 5 of this Part (rules applying to employees resident, ordinarily resident or domiciled outside the UK).

(3) "Taxable specific income" from an employment for a tax year means the full amount of any specific employment income which, by virtue of Part 6 or 7 or any other enactment, counts as employment income for that year in respect of the employment.

11 Calculation of "net taxable earnings"

(1) For the purposes of this Part the "net taxable earnings" from an employment in a tax year are given by the formula--

TE - DE

where--

TE means the total amount of any taxable earnings from the employment in the tax year, and
DE means the total amount of any deductions allowed from those earnings under provisions listed in section 327(3) to (5) (deductions from earnings: general).

(2) If the amount calculated under subsection (1) is negative, the net taxable earnings from the employment in the year are to be taken to be nil instead.

(3) Relief may be available under section 380(1) of ICTA (set-off against general income)--

(a) where TE is negative, or

(b) in certain exceptional cases where the amount calculated under subsection (1) is negative.

(4) If a person has more than one employment in a tax year, the calculation under subsection (1) must be carried out in relation to each of the employments.

12 Calculation of "net taxable specific income"

(1) For the purposes of this Part the "net taxable specific income" from an employment for a tax year is given by the formula--

TSI - DSI

where--

TSI means the amount of any taxable specific income from the employment for the tax year, and
DSI means the total amount of any deductions allowed from that income under provisions of the Tax Acts not included in the lists in section 327 (3) and (4) (deductions from earnings: general).

(2) If the amount calculated under subsection (1) is negative, the net taxable specific income from the employment for the year is to be taken to be nil instead.

(3) If a person has more than one kind of specific employment income from an employment for a tax year, the calculation under subsection (1) must be carried out in relation to each of those kinds of specific employment income; and in such a case the "net taxable specific income" from the employment for that year is the total of all the amounts so calculated.

13 Person liable for tax

(1) The person liable for any tax on employment income under this Part is the taxable person mentioned in subsection (2) or (3).

This is subject to subsection (4).

(2) If the tax is on general earnings, "the taxable person" is the person to whose employment the earnings relate.

(3) If the tax is on specific employment income, "the taxable person" is the person in relation to whom the income is, by virtue of Part 6 or 7 or any other enactment, to count as employment income.

(4) If the tax is on general earnings received, or remitted to the United Kingdom, after the death of the person to whose employment the earnings relate, the person's personal representatives are liable for the tax.

(5) In that event the tax is accordingly to be assessed on the personal representatives and is a debt due from and payable out of the estate.

Chapter 4 Taxable earnings: rules applying to employee resident, ordinarily resident and domiciled in UK

Taxable earnings

14 Taxable earnings under this Chapter: introduction

(1) This Chapter sets out for the purposes of this Part what are taxable earnings from an employment in a tax year in cases where section 15 (earnings for year when employee resident, ordinarily resident and domiciled in UK) applies to general earnings for a tax year.

(2) In this Chapter--

(a) sections 16 and 17 deal with the year for which general earnings are earned, and

(b) sections 18 and 19 deal with the time when general earnings are received.

(3) In the employment income Parts any reference to the charging provisions of this Chapter is a reference to section 15.

Employees resident, ordinarily resident and domiciled in UK

15 Earnings for year when employee resident, ordinarily resident and domiciled in UK

(1) This section applies to general earnings for a tax year in which the employee is resident, ordinarily resident and domiciled in the United Kingdom.

(2) The full amount of any general earnings within subsection (1) which are received in a tax year is an amount of "taxable earnings" from the employment in that year.

(3) Subsection (2) applies--

(a) whether the earnings are for that year or for some other tax year, and

(b) whether or not the employment is held at the time when the earnings are received.

Year for which general earnings are earned

16 Meaning of earnings "for" a tax year

(1) This section applies for determining whether general earnings are general earnings "for" a particular tax year for the purposes of this Chapter.

(2) General earnings that are earned in, or otherwise in respect of, a particular period are to be regarded as general earnings for that period.

(3) If that period consists of the whole or part of a single tax year, the earnings are to be regarded as general earnings "for" that tax year.

(4) If that period consists of the whole or parts of two or more tax years, the part of the earnings that is to be regarded as general earnings "for" each of those tax years is to be determined on a just and reasonable apportionment.

(5) This section does not apply to any amount which is required by a provision of Part 3 to be treated as earnings for a particular tax year.

17 Treatment of earnings for year in which employment not held

(1) This section applies for the purposes of this Chapter in a case where general earnings from an employment would otherwise fall to be regarded as general earnings for a tax year in which the employee does not hold the employment.

(2) If that year falls before the first tax year in which the employment is held, the earnings are to be treated as general earnings for that first tax year.

(3) If that year falls after the last tax year in which the employment was held, the earnings are to be treated as general earnings for that last tax year.

(4) This section does not apply in connection with determining the year for which amounts are to be treated as earnings under Chapters 2 to 11 of Part 3 (the benefits code).

When general earnings are received

18 Receipt of money earnings

(1) General earnings consisting of money are to be treated for the purposes of this Chapter as received at the earliest of the following times--

Rule 1

The time when payment is made of or on account of the earnings.

Rule 2

The time when a person becomes entitled to payment of or on account of the earnings.

Rule 3

If the employee is a director of a company and the earnings are from employment with the company (whether or not as director), whichever is the earliest of--

(a) the time when sums on account of the earnings are credited in the company's accounts or records (whether or not there is any restriction on the right to draw the sums);

(b) if the amount of the earnings for a period is determined by the end of the period, the time when the period ends;

(c) if the amount of the earnings for a period is not determined until after the period has ended, the time when the amount is determined.

(2) Rule 3 applies if the employee is a director of the company at any time in the tax year in which the time mentioned falls.

(3) In this section "director" means--

(a) in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body,

(b) in relation to a company whose affairs are managed by a single director or similar person, that director or person, and

and includes any person in accordance with whose directions or instructions the directors of the company (as defined above) are accustomed to act.

(4) For the purposes of subsection (3) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity.

(5) Where this section applies--

(a) to a payment on account of general earnings, or

(b) to sums on account of general earnings,

it so applies for the purpose of determining the time when an amount of general earnings corresponding to the amount of that payment or those sums is to be treated as received for the purposes of this Chapter.

19 Receipt of non-money earnings

(1) General earnings not consisting of money are to be treated for the purposes of this Chapter as received at the following times.

(2) If an amount is treated as earnings for a particular tax year under any of the following provisions, the earnings are to be treated as received in that year--

section 81 (taxable benefits: cash vouchers),
section 94 (taxable benefits: credit-tokens),
Chapter 5 of Part 3 (taxable benefits: living accommodation),
Chapter 6 of Part 3 (taxable benefits: cars, vans and related benefits),
Chapter 7 of Part 3 (taxable benefits: loans),
Chapter 8 of Part 3 (taxable benefits: notional loans in respect of acquisitions of shares),
Chapter 9 of Part 3 (taxable benefits: disposals of shares for more than market value),
Chapter 10 of Part 3 (taxable benefits: residual liability to charge),
section 222 (payments treated as earnings: payments on account of tax where deduction not possible),
section 223 (payments treated as earnings: payments on account of director's tax).

(3) If an amount is treated as earnings under section 87 (taxable benefits: non-cash vouchers), the earnings are to be treated as received in the tax year mentioned in section 88.

(4) If subsection (2) or (3) does not apply, the earnings are to be treated as received at the time when the benefit is provided.

Chapter 5 Taxable earnings: rules applying to employee resident, ordinarily resident or domiciled outside UK

Taxable earnings

20 Taxable earnings under this Chapter: introduction

(1) This Chapter sets out for the purposes of this Part what are taxable earnings from an employment in a tax year in cases where any of the following sections applies to general earnings for a tax year--

(a) section 21 (earnings for year when employee resident and ordinarily resident, but not domiciled, in UK, except chargeable overseas earnings),

(b) section 22 (chargeable overseas earnings for year when employee resident and ordinarily resident, but not domiciled, in UK),

(d) section 26 (foreign earnings for year when employee resident, but not ordinarily resident, in UK),

(e) section 27 (UK-based earnings for year when employee not resident in UK).

(2) In this Chapter--

(a) sections 29 and 30 deal with the year for which general earnings are earned,

(b) sections 31 to 34 deal with the time when general earnings are received or remitted,

(d) sections 38 to 41 deal with the place where the duties of an employment are performed.

(3) In the employment income Parts any reference to the charging provisions of this Chapter is a reference to any of the sections listed in subsection (1).

Employees resident and ordinarily resident in UK

21 Earnings for year when employee resident and ordinarily resident, but not domiciled, in UK, except chargeable overseas earnings

(1) This section applies to general earnings for a tax year in which the employee is resident and ordinarily resident, but not domiciled, in the United Kingdom except to the extent that they are chargeable overseas earnings for that year.

(2) The full amount of any general earnings within subsection (1) which are received in a tax year is an amount of "taxable earnings" from the employment in that year.

(3) Subsection (2) applies--

(a) whether the earnings are for that year or for some other tax year, and

(b) whether or not the employment is held at the time when the earnings are received.

(4) Section 23 applies for calculating how much of an employee's general earnings are "chargeable overseas earnings" for a tax year, and are therefore within section 22(1) rather than subsection (1) above.

22 Chargeable overseas earnings for year when employee resident and ordinarily resident, but not domiciled, in UK

(1) This section applies to general earnings for a tax year in which the employee is resident and ordinarily resident, but not domiciled, in the United Kingdom to the extent that the earnings are chargeable overseas earnings for that year.

(2) The full amount of any general earnings within subsection (1) which are remitted to the United Kingdom in a tax year is an amount of "taxable earnings" from the employment in that year.

(3) Subsection (2) applies--

(a) whether the earnings are for that year or for some other tax year, and

(b) whether or not the employment is held at the time when the earnings are remitted;

but that subsection has effect subject to any relief given under section 35 (delayed remittances: claim for relief).

(4) Section 23 applies for calculating how much of an employee's general earnings are "chargeable overseas earnings" for a tax year, and are therefore within subsection (1) rather than section 21(1).

(5) Where any chargeable overseas earnings are taxable earnings under subsection (2), any deduction taken into account under section 23(3) in calculating the amount of the chargeable overseas earnings--

(a) cannot then be deducted under section 11 from those taxable earnings, but

(b) may be deducted under that section from any taxable earnings under section 21.

23 Calculation of "chargeable overseas earnings"

(1) This section applies for calculating how much of an employee's general earnings for a tax year are "chargeable overseas earnings" for the purposes of sections 21 and 22.

(2) General earnings for a tax year are "overseas earnings" for that year if--

(a) in that year the employee is resident and ordinarily resident, but not domiciled, in the United Kingdom,

(b) the employment is with a foreign employer, and

(3) To calculate the amount of "chargeable overseas earnings" for a tax year--

Step 1

Identify the full amount of the overseas earnings for that year under subsection (2).

Step 2

Subtract any amounts that would (assuming they were taxable earnings) be allowed to be deducted from those earnings under--

(a) section 232 or Part 5 (deductions allowed from earnings),

(b) section 592(7) of ICTA (contributions to exempt approved schemes),

(d) section 262 of CAA 2001 (capital allowances to be given effect by treating them as deductions from earnings).

Step 3

Apply any limit imposed by section 24 (limit where duties of associated employment performed in UK).

The result is the chargeable overseas earnings for the tax year.

24 Limit on chargeable overseas earnings where duties of associated employment performed in UK

(1) This section imposes a limit on how much of an employee's general earnings are chargeable overseas earnings for a tax year under section 23 if--

(a) in that year the employee holds associated employments as well as the employment to which subsection (2) of that section applies ("the relevant employment"), and

(b) the duties of the associated employments are not performed wholly outside the United Kingdom.

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