RPSM05101560 - Technical Pages: Contributions and tax relief: Member contributions: Refunds of contributions: Interest paid on the refund of contributions

Interest paid on the refund of contributions

The definitions of both a short service refund lump sum and a refund of excess contributions lump sum limit the amount that can be treated as such a payment to the amount of actual contributions (or excess contributions) made by the member. But a registered pension scheme’s rules may provide for interest to be paid to the member in respect of these refunds. In some cases the payment of that interest etc. is not treated under the scheme rules as part of the short service refund lump sum or refund of excess contributions lump sum payment. Should a scheme wish to pay interest in these circumstances, such interest may be treated as a scheme administration member payment.

A scheme administration payment is a payment for the administration or management of the scheme. Such payments should be made on an arm’s length, commercial basis. So any interest paid by a scheme on any refund of contributions should be no more than a reasonable commercial rate if it is to be a scheme administration member payment. Any excess will be an unauthorised member payment and taxed accordingly - (see RPSM04104000).

An interest payment made in addition to a short service refund lump sum or a refund of excess contributions lump sum that meets the definition of scheme administration member payment is taxable on the member under section 369, Income Tax (Trading and Other Income) Act 2005 (previously Case III Schedule D).