Purchased Life Annuity – Taxation

A Purchased Life Annuity (PLA) is an Immediate Life Annuity you have bought with your own money. Each payment is divided into two parts, a ‘capital element’ and an ‘interest element’. Income tax is payable only on the interest element but to qualify for this treatment the annuity has to be accepted by HM Revenue & Customs.

How is this achieved?
When you buy the annuity you must complete tax form PLA6 which will be sent to HM Revenue & Customs.

If the annuity is not accepted by HM Revenue & Customs as a Purchased Life Annuity, then income tax is payable on the whole annuity.

How much tax is deducted?
Normally the interest element will be taxed at the savings rate applying at the date of payment.

If you are a basic rate tax payer the deduction of tax is deemed by HM Revenue & Customs to meet the whole liability. However, if you are a higher rate tax payer, you may find that further tax (up to the higher rate) has to be paid.

If you believe that you are no longer liable for taxation on the Purchased Life Annuity, please advise us so that we can take the appropriate action to enable us to pay the annuity without deduction of tax.

What happens if you are a non tax payer?
You should complete the form ‘Application to receive an annuity without tax taken off’ which can be obtained from the annuity provider or the HM Revenue & Customs.

How should you show the purchased life Annuity on your annual tax return?
Your annuity should be declared under ‘other income from savings and investments’. The notes which accompany your annual tax return will give you full details of what figures you need to re enter. If you are a non tax payer then ‘nil’ should be entered in the appropriate column.

Tax certificates are issued as soon as possible after 5 April each other to enable you to complete your tax return. You should always keep the certificates in case they are requested by HM Revenue & Customs