RPSM04104970 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Taxation of Deemed Unauthorised Payment

Taxation of deemed unauthorised payment

The deemed unauthorised member payment will trigger an unauthorised payments charge and, possibly, the unauthorised payments surcharge. This means that the member will be liable to an income tax charge of up to 55%, based on the amount of the lump sum in question that is deemed to be an unauthorised payment.

The scheme administrator of the registered pension scheme that makes the deemed unauthorised member payment will be subject to a scheme sanction charge of between 15% and 40%, based on the amount of the payment.

A scheme member who intends to take a pension commencement lump sum as part of a recycling device will be required to inform the scheme administrator of that fact within 30 days of the date of the deemed unauthorised payment. More information about the information that the member has to give to the scheme administrator can be found on RPSM12200035.

As, from the 11 August 2006, the member has to inform the scheme administrator of any recycling of a pension commencement lump sum the scheme administrators should not be unwittingly caught by the recycling rule, resulting in a scheme sanction charge. In addition the scheme administrator should be in a position to fulfil their responsibilities to report the unauthorised payment to the HMRC in accordance with RPSM12301030.

Any notification made by the scheme member to the scheme administrator should be retained in accordance with the requirements of RPSM12300020 (retention of records).

Scheme administrators are able to apply to HMRC to ask it to discharge their liability in respect of a scheme sanction charge. Such an application can be made where the scheme administrator considers that the grounds for such a discharge are just and reasonable. The scheme administrator must set out those grounds as part of the application.

Reasonable grounds would, for example, in the case of a member who is arm’s length from the pension scheme and the scheme administrator, be where:

• a scheme administrator asks the member, who is about to receive a pension commencement lump sum, to declare whether or not the lump sum is being taken with the intention of significantly increasing contributions to one or more registered pension schemes,
• the member declares to the scheme administrator that the pension commencement lump sum is not being used to increase contributions to one or more registered pensions schemes, and
• despite the declaration to the contrary to the scheme administrator, the member does use and intended all along to use the pension commencement lump sum to significantly increase contributions to one or more registered pension schemes.

However, where a scheme sanction charge liability is discharged in respect of a particular pension commencement lump sum that is treated as an unauthorised payment under the recycling rule, that discharge does not stop the unauthorised payment from being a “scheme chargeable payment”. In the circumstances, such scheme chargeable payments would still be included in any review to ascertain whether or not one of the possible grounds for de- registration applies – the ground in question being that amount of scheme chargeable payments in a 12 month period exceeds the de-registration threshold.

Should the threshold be exceeded, HMRC officials would then consider whether or not the registration of the pension scheme concerned should be withdrawn. It is unlikely that HMRC would withdraw registration if the scheme chargeable payments that led to the de-registration threshold being exceeded were payments caught by the recycling rule and, because there were reasonable grounds, HMRC had agreed to discharge the scheme administrator’s scheme sanction charge liability in respect of those payments.

More detailed guidance concerning the taxation of unauthorised payments is at RPSM04104000

More detailed guidance concerning the scheme sanction charge is at RPSM04104800