RPSM05101570 - Technical Pages: Contributions and tax relief: Member contributions: Refunds of contributions: Taxation of refunds

Taxation of refunds of contributions

Short service refund lump sum

[s205] [s636A(3) ITEPA 2003] [Taxation of Pension Schemes (Rates, etc) Order 2010 - SI 2010/536]

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

Tax years 2006/07 to 2009/10

In the tax years 2006/07 to 2009/10 the amount of tax due is

• 20% in respect of the first £10,800 refunded, and
• 40% in respect of any refund made above £10,800.

Tax years 2010/11 onwards

In tax years 2010/11 onwards the amount of tax due is

• 20% in respect of the first £20,000 refunded, and
• 50% in respect of any refund made over £20,000.

The scheme administrator may deduct the tax they are liable to from the actual payment made to the individual, where the rules of the scheme making the payment allow this. This will not change the level of charge due; the tax charge applies to the gross 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 tax payer. Also, the person receiving the payment cannot off-set the tax paid against any other taxable income.

Refund of excess contributions lump sum

A refund of excess contributions lump sum is not subject to any income tax charge. It is paid tax-free. This reflects the fact that no tax relief has been granted on the contributions being refunded in the first place.