EIM65870 - Tax treatment of Local Authority officials and employees: terminal gratuities for non-pensionable service

This guidance deals with the tax treatment of terminal gratuities made since 6 July 1995 for non- pensionable service under the Local Government Superannuation (Gratuities) Regulations 1995 and the Local government (Discretionary Payments) Regulations 1996. PAYE Technical.

The regulations allow local authorities, at their discretion, to pay lump sum gratuities on termination of employment to employees who have not been members of the Local Government Superannuation Scheme for the whole or part of their service.

Under these regulations, lump sum gratuities may be made under separate schemes for redundancy, death in service and retirement. Deal with them as follows:

• redundancy lump sum: chargeable under Section 401 ITEPA 2003 (see EIM13750)
• retirement and death lump sums paid before 6 April 2006: these normally fall within HMRC limits for approval. It is expected that local authorities will seek such approval from CAR Pension Schemes Services for these schemes, and special arrangements are in place in that office to assist this process. Any lump sum from such a scheme after the date of approval is exempt from tax. If such approval is not obtained, schemes dealing with retirement or death will be non-approved retirement benefits schemes and the lump sums within Section 393 ITEPA 2003 (see EIM15100)
• retirement and death lump sums (from 6 April 2006): if the scheme under which the payments are made was previously approved, the scheme became a registered pension scheme (see EIM74014) on 6 April 2006. Provided no benefits are paid in relation to service after 5 April 2006, any lump sum is exempt from tax. If the scheme covers post 5 April 2006 or the scheme was not approved but is registered, the maximum tax exempt retirement lump sum payable is 25% of the amount of the gratuity awarded, the remaining 75% has to be used to provide a pension. Death lump sums will remain tax exempt. In view of the relatively small gratuities permitted under the 1996 regulations, unless the scheme was approved, most local authorities are likely to make the payments under an employer-financed retirement benefits scheme. So the lump sums will be within Section 393 ITEPA 2003 (see EIM15100).

CAR Pension Schemes Services can provide further advice if required.