RPSM09300120 – Scheme Administrator Pages: Member pages: Lump sum payments

A refund of excess contributions lump sum

Where a member has paid relievable pension contributions in a tax year of more than the maximum amount that can receive tax relief the legislation allows the amount of contributions that cannot receive tax relief (the excess) to be repaid to the member.

The relievable pension contributions made in a tax year are tax relievable (whether through the net pay arrangement or through relief at source) provided they do not exceed the individual’s relevant UK earnings (or, if lower and using the relief at source provisions, £3,600). RPSM05101120 explains what the annual limit on tax relief on member contributions is.

Where relievable pension contributions are paid that exceed the relievable amount, the excess can be refunded. The legislation refers to this as the ‘excess contributions condition’. If this condition is met, the excess contributions can be paid to the member as a refund of excess contributions lump sum.

The payment of a refund of excess contributions lump sum must be made before the end of the period of six years following the end of the tax year in which the ‘excess contributions condition’ was met, i.e. the tax year in which the excess contribution was paid.

The legislation is very specific in measuring the amount that may be paid as a refund of excess contributions lump sum. This is referred to in the legislation as the available excess contributions allowance. This allowance is the amount of excess contributions paid in that tax year, less any earlier refund payments made (either in the same or an earlier tax year) to the member in respect of the contributions paid in that tax year from any registered pension scheme.

This is represented in the legislation by the following formula

RPC – MAR – ALS
RPC is the amount of relievable pension contributions paid by (or on behalf of) the member in the relevant tax year.
MAR is the maximum amount of relief to which the member is entitled in that tax year.
ALS is the total value of any refund of excess contribution lump sum(s) previously paid in respect of that tax year to the member.

The maximum amount which can be treated as a refund of excess contributions lump sum is restricted to an amount equal to the amount of the excess contributions made to the scheme on the basis described above.

RPSM09104830 gives more information on the situation if interest is paid on a refund of excess contribution lump sum.