RPSM04101090 - Technical Pages: Taxation: Authorised member payments: Short service refund lump sums

Taxation of short service refund lump sums

[s205][Taxation of Pension Schemes (Rates. etc) Order 2010 - SI2010/536] 

A short service refund lump sum (see RPSM09104700) triggers a free standing tax charge called the short service refund lump sum charge.

The person liable to the short service refund lump sum charge is the scheme administrator of the registered pension scheme making the payment. The tax charge applies whether or not the scheme administrator or the person receiving the short service refund lump sum is resident, ordinarily resident or domiciled in the UK.

Tax years 2006/07 to 2009/10

The amount of tax due is for a short service refund lump sum made in any of the tax years 2006/07 to 2009/10

• 20% in respect of the first £10,800 of the payment, and
• 40% in respect of the remainder of the payment over £10,800 (if there is any such remainder).

Tax years 2010/11 onwards

The amount of tax due for a short service refund lump sum made in the 2010/11 tax year or in a later tax year is

• 20% in respect of the first £20,000 of the payment, and
• 50% in respect of the remainder of the payment over £20,000 (if there is any such remainder).

The Treasury can amend these rates and the threshold by order.

Scheme administrators may deduct the tax they are liable to pay from the short service refund lump sum before making the payment to the member, where the rules of the scheme making the payment allow this. The tax charge applies to the amount of the lump sum before the deduction of the tax.

It is the scheme administrator who is liable to the tax charge and not the person who receives the lump sum payment. So if the recipient is a non-taxpayer they cannot make any repayment claim in respect of the tax paid. There is no further tax due for the person who receives the lump sum payment, even if they are a higher rate taxpayer. Also, the person receiving the payment cannot off-set the tax paid against any other taxable income.