CheckLists.Tax (beta)
Q7. Payments and benefits from pension scheme
GENERAL
- Payments made in genuine error
- HMRC accept that a payment made "in genuine error" and rectified as soon as possible are not unauthorised payments (PTM131000).
Legislation:
Cases:
HMRC manuals:
PTM131000 - Unauthorised payments: essential principles;
Commentary:
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INCOME TAX
- Multiple charges on unauthorised payments by registered pension scheme
General
- An unauthorised payment is not treated as income (s.208(10)), but is subject to income tax charges.
Unauthorised payments charge
- Flat rate income tax charge at 40% based on value of unauthorised payment (s.208).
- Person liable:
- Unauthorised member payment = member if made before death, otherwise the recipient of the payment.
- Unauthorised employer payment = person to or in respect of whom payment is made.
- If more than one person liable, joint + several liability (s.208(3)).
- Residence is irrelevant (s.208(4)).
Unauthorised payments surcharge
- If unauthorised payments exceed a 25% threshold, the surcharge applies at 15% (see s.209 onwards).
Scheme sanction charge
- An unauthorised payment is scheme chargeable unless it is exempt
Legislation: FA 2004, s.208; 209
Cases:
HMRC manuals:
Commentary:
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Unauthorised payments charge
- Unauthorised payment to person connected with member/employer
- If a payment is made by a pension scheme to a person connected with a member/sponsoring employer (or has been), the payment is treated as made in respect of the person who is/has been a member/sponsoring employer (s.161(5)).
- Does not apply if the person who the payment is made to/in respect of is themself a member/sponsoring employer (or has been) (s.161(5)(b)).
- Meaning of connected - see ITA 2007, s.993.
Legislation: FA 2004, s.161;
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HMRC manuals:
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- Value shifting from pension scheme in favour of member/employer/connected person: deemed unauthorised payment
General rule
- If:
(1) A relevant event occurs.
(2) The relevant event occurs in a way that differs from what might be expected between arm's length parties.
(3) In connection with that relevant event, the value of an asset held for the purposes of the pension scheme is reduced or a liability is increased.
(4) The value of an asset held by/for the benefit of person is increased or a liability is reduced for the benefit of a person.
(5) That person is/was a member or sponsoring employer or connected with either.
- Then: the registered pension scheme is treated having made an unauthorised payment to that person (s.174 (member); s.181 (employer)).
- Member deceased: payment treated as in respect of member but to person holding asset or liability (s.174(2)).
- Deemed payment is based on difference to what might be expected if parties to transaction were at arm's length (s.174(4)).
Connected persons
- An increase in value/reduction of liability for a person connected with a member/sponsoring employer etc. is treated as for the benefit of the member/sponsoring employer (s.161(7)).
- If member/employer is dead, test connection at date of death.
- Connected person - see ITA 2007, s.993.
Relevant events
- Change in the value of a currency.
- Creation, exercise, failure to exercise, alteration, release etc. of any power, right, option or liability relating to assets or liabilities of the scheme etc. (s.174(3), s.181(2)).
- Examples (PTM133700):
- change of rights attached to shares (e.g. to exclude right to dividend).
- altering the rights on a lease (e.g. to increase rent on lease of property to scheme).
- releasing a restrictive covenant in lease to member.
- No charge if transaction is arm's length (e.g. ordinary rent review on commercial terms).
Tax charges:
- Unauthorised payment charge (s.208).
- Scheme sanction charge on administrator (s.239).
Legislation: FA 2004, s.161; s.174; s.181;
Cases:
HMRC manuals:
Commentary:
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Settlements legislation: attribution of income to settlor
- Attribution rule does not apply to income that is a benefit under a relevant pension scheme
ITTOIA s.627.
Legislation:
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