Section 641(1) provides that no liability to income tax arises on
If the Secretary of State certifies that a pension or retired
pay of a kind listed above is only partly attributable to
disablement or disability, only the part attributable to
disablement or disability will fall within section 641(1).
Injury or disablement pensions under subsection 1(f) and 1(g)
are payable by the Ministry of Defence to merchant seafarers
(including naval auxiliary personnel and persons serving in the
fishing fleets and the pilotage and light vessel services).
Section 641 covers a wide variety of pensions and awards in
respect of disablement including all War Disablement Pensions
administered by the Veterans Agency, an executive agency of the
Ministry of Defence. Relief from income tax applies whether the
disablement was contracted in time of war or peace.
Awards in respect of disablement caused by service in the armed forces on or after 6 April 2005 have to be made under the Armed Forces Compensation Scheme (“the AFCS”) established under section 1(2) of Armed Forces (Pensions and Compensation) Act 2004. The AFCS provides for benefits to be payable to a person by reason of illness or injury (whether physical or mental), which is attributable (wholly or partly) to service in the armed forces or the reserve forces. AFCS benefits include lump sum payments to armed forces personnel who remain in service in addition to lump sums and Guaranteed Income Payments paid after termination of service. No liability to income tax arises on these AFCS benefits by virtue of section 641(1)(h) introduced by section 16(6) Finance Act 2005 which has effect for tax years 2005-06 onwards.
See EIM74303 for further guidance on how the section 641 exemption applies in practice. EIM74304 lists a number of allowances intended to supplement an exempt pension that may be regarded as covered by the section 641 exemption.
