RPSM04101140 - Technical Pages: Taxation: Authorised member payments: Taxation of trivial commutation, winding up and certain other small lump sums paid after death
Taxation of trivial commutation, winding up and certain other small lump sums paid after death
[s636B & 683 ITEPA 2003] [The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171]
The following lump sums paid after death are taxable pension income in the tax year in which the payment is made
- a trivial commutation lump sum death benefit, see RPSM10105260,
- a winding up lump sum death benefit see RPSM10105510 or
- certain other small lump sum payments (see RPSM09105490)
The person liable to the tax is the person who receives the payment.
The taxable amount is the full amount of the lump sum payment.
As the payments are taxable as pension income the rate of tax is the lump sum recipient’s marginal rate of tax for the tax year in which the lump sum is paid. So if the individual is a basic rate taxpayer, the rate is 20%, if a higher rate taxpayer the rate is 40% and so on.
PAYE applies to these lump sum payments and the payer of the lump sum must operate PAYE on the lump sum payment in accordance with the PAYE rules before paying the lump sum.
Where the lump sum payment is in respect of a pension already in payment to the dependant, use the PAYE code already in operation. Before 6 April 2013, where the dependant’s pension had not yet been paid and the scheme did not have a PAYE code for the recipient an emergency code applied. From 6 April 2013 onwards, the basic rate (BR) tax code should be applied in such cases.
Guidance on how to operate PAYE correctly on these lump sums can be found in CWG2 - Employer’s further guide to PAYE and NICs. A copy of the CWG2 can be found on the HMRC website. To find it on the HMRC website either use the ‘find a form’ function or type CWG2 into the ‘search’ box at the top of the HMRC webpage.
There is also guidance for pension schemes on how to operate PAYE on the HMRC website at http://www.hmrc.gov.uk/paye/payroll/pensions/. This includes guidance on how to operate PAYE on trivial and winding up lump sums.
Because of the way PAYE works on these lump sum payments often the recipient ends up paying too much tax. Although operating the BR code from 6 April 2013 will reduce the number of people overpaying tax, this may still happen. Where this does happen, the person who has paid too much tax can claim the tax back in year. There is guidance for individuals on how to do this on the HMRC website at http://www.hmrc.gov.uk/incometax/overpaid-thro-pension.htm. The problem is that many of the people affected won’t know that they may have paid too much tax and so are entitled to a tax refund. To help the people affected please include advice on how to claim a refund when you issue the lump sum payment. There is some suggested wording that you could use shown below. This will also help you by reducing the number of enquiries you may get on how the lump sum has been taxed and claiming refunds.
Suggested wording pension payers can use when making the lump sum payment
Your form P45 details include the amount of tax deducted from your pension commutation lump sum. The tax deducted may not be the right amount due when all of your income for the year is taken into account.
After next 5 April HM Revenue & Customs will check if you have paid the correct amount of tax, and if not they will contact you. But if you think you have paid too much tax you can ask HM Revenue & Customs for a tax refund now - you do not have to wait until 5 April.
To claim a refund call your usual Revenue & Customs office and ask for form P53. You can find the numbers on the ‘contact us’ pages of the HMRC website at www.hmrc.gov.uk/, or alternatively, in the phone book under HM Revenue & Customs. Alternatively, from June 2013, you can complete your P53 online without needing to contact HMRC directly. You should find this easier to do than completing the form manually.
It helps if you have your National Insurance number to hand when you call.