RPSM09204050 - Member Pages: Member Benefits: Lump Sum Benefits: Example of payment made up of more than one authorised payment

Example of a payment made up of more than one authorised payment

Hilary leaves pensionable service under an occupational pension scheme of which she is a member. Hilary has less than 2 years pensionable service, and under the rules of her scheme she is entitled to a refund of her contributions.

This refund payment may qualify to be treated for tax purposes as a short service refund lump sum.

The maximum amount that can be paid as a short service refund lump sum is an amount equal to the total amount paid by Hilary as contributions to that scheme/ arrangement throughout her membership. This comes to £20,000.

The scheme makes a payment to Hilary of £25,000, which includes £5,000 interest on top of the refund of her contributions. The interest element is not a short service refund lump sum payment. The £5,000 interest payment does however meet the definition of a scheme administration member payment, which is another type of authorised payment.

So although one payment of £25,000 has been made, for tax purposes this is treated as two payments. Firstly, a £20,000 short service refund lump sum, and secondly a £5,000 scheme administration member payment. The first £10,800 of the short service refund lump sum is taxable at 20% with the remaining £9,200 taxable at 40%. The scheme administrator is liable for the short service refund lump sum tax charge. The £5,000 payment of interest treated as a scheme administration payment, is taxable on the member as part of their income. Hilary must return this income on her self assessment income tax return for the tax year in which she received the payment.