PAYE93080 - Reconcile individual: end of year reconciliation: trivial commutation payments
This subject is presented as follows
Background
Before the pension / annuity comes into payment
After the pension / annuity has started to be paid
After end of year
Action on PAYE sections
Background
Registered pension schemes and life insurance companies can pay trivial commutation payments. This means that a single lump sum is paid to the recipient instead of a continuing small annuity or pension.
The usual PAYE procedures may result in the customer paying higher rates of tax on the date the payment is made, even when over the full year only basic or lower rate tax is due. This is because of the way in which the tax tables work. You should be aware that the customer may make a provisional repayment claim.
Instructions on how to deal with both end of year and in-year claims to repayment are given in ‘Trivial commutation payments’ (Action Guide) at PAYE93081 and ‘Trivial commutation payments repayment calculation’ (Action Guide) at PAYE94046.
Up until April 2006 there were different tax rules for such payments, depending on the type of pension scheme making the payment. Trivial pension commutation payments paid by occupational pension schemes were not taxable income of the recipient but triggered a tax charge on the scheme administrator, whereas similar payments from personal pension schemes were treated as taxable income of the recipient and PAYE was applied. The payer could have operated PAYE by applying an emergency code, or a code had been previously issued.
The legislation has changed so that from April 2006 all trivial /annuity commutation payments are taxable pension income of the recipient and the pension payers must apply PAYE. This applies to all pension schemes and also to life insurance companies and other bodies that commute annuities, where the annuity is in respect of a former pension scheme.
The pension provider / annuity payers will provide P45 details in these circumstances.
As these payments are PAYE income, the payer will apply PAYE in the usual way. A pension or annuity can be commuted either
- Before the pension / annuity starts to be paid
Or
- After payment has already commenced
Before the pension / annuity comes into payment
As the pension / annuity has not yet come into payment, the pension / annuity payer will not have a tax code to tax the commutation payment. The payer will not complete form P46, but otherwise the usual PAYE procedures will apply, and the payer will use the Emergency Code on a Week 1 basis. Form P45 will be issued showing the commutation payment and the relevant date that the payment was made as the date of leaving.
Up to twenty five per cent of the trivial commutation payment in respect of a pension / annuity that has not yet come into payment is exempt from tax. The payer will only enter the taxable portion of the payment on documentation for HMRC. The full amounts shown on forms P45 / P14 should therefore be used in any calculations.
After the pension / annuity has started to be paid
As the pension / annuity has already started to be paid, the payer will already have a tax code in use to tax the commutation payment. Form P45 will then be completed showing both the commutation payment and any other payments made during the tax year, the total tax deducted together with the relevant date the payment was made as the date of leaving.
All of the trivial commutation payment in respect of a pension / annuity that has already started to be paid is taxable income.
After end of year
Forms P35 and P14 will be provided after the end of the year by the pension / annuity provider in the usual way, and the individual taxpayer records should then be reviewed, issuing informal tax calculations / making any repayment due as appropriate.
Note: You must be aware that receipt of forms P45 for pension / annuity references does not always mean that the taxpayer has died.
When you review the final liability for the year, you should always issue form P53 before review, so that the full details of investment income can be included in the calculations. Calculations should only be issued where the result of the calculation is outside the relevant under / overpayment tolerance.
Action on PAYE sections
When forms P45 for pension / annuity references are received in the relevant offices, there will not be a tax record as a matter of course. This could be because either
- The pension / annuity has not yet come into payment
Or
- The pension / annuity has been coded out at the main source and the pension / annuity itself has been code NT and the PAYE record deleted in accordance with the instructions
The Pensions / Annuity payer will not provide P46 in these circumstances
You will need to trace any existing tax records for the individual. The action taken will depend upon the circumstances, as there is little point in setting up records only to close the employment immediately when other records exist elsewhere. Instructions on how to action form P45 can be found at PAYE62000 onwards.
