Background Pensions tax legislation
4.The legislation relating to UK registered pension schemes is set out in Part 4 of Finance Act 2004 and came into force on 6 April 2006 (commonly known as A-day). Legislation relating to the taxation of pension income is set out in Part 9 of the Income Tax (Earnings and Pensions) Act 2003.
5.The UK’s existing system of pensions tax relief is typically described as Exempt, Exempt, Taxed (E, E, T), where each of the three letters corresponds to a phase in the lifecycle of pension savings. The first relates to the contributions, the second to the investment return and the third to the benefit payout:
	(E): tax relief is available on individual and employer contributions to a pension scheme. The employer contribution is not treated as a taxable benefit-in-kind for the employee. This means that contributions to a pension are not subject to income tax or to corporation tax. Furthermore, employer contributions do not give rise to a national insurance contribution (NICs) liability. In relation to individual contributions, tax relief is available at the individual’s marginal rate, meaning relief is worth more to individuals who pay a higher marginal rate of income tax. Relief is available on contributions worth up to 100% of individuals’ earned income or £3,600 if higher. But if annual and/or lifetime limits are exceeded, there are tax charges on the excess.
	(E): investment growth within pension schemes is not subject to income or capital gains tax.
	(T): when benefits are drawn, individuals are able to take a tax-free lump sum of up to 25% of the value of their benefits. The remaining pension rights are used to deliver an income usually payable for life, which is taxed like any other pension income. Pensions paid from tax-registered pension schemes are not subject to NICs.
6.This tax relief is given so that the funds are used to provide benefits later in life for the member and their dependants. The tax rules therefore set out what payments a registered pension scheme is authorised to make to or in respect of a person who is or has been a member of the pension scheme. That is, payments that meet the purpose for which tax relief has been given. These payments are known as authorised member payments and are set out in Finance Act 2004.