RPSM09104760 - Technical Pages: Member benefits: Lump sums: Short service refund lump sum: Taxation issues

Taxation issues

[s205][The Taxation of Pension Schemes (Rates. Etc) Order 2010 - SI 2010/536][s636A(3), Chptr 15A, ITEPA 2003] 

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.

This tax is to reflect the fact that tax relief will have been given in respect of the contributions being refunded when first made by the member.

Tax years 2006/07 to 2009/10

The rate of the tax charge for a short service refund lump sum made in any of the tax years 2006/07 to 2009/10 is

• 20% in respect of the first £10,800 refunded, and
• 40% in respect of the remainder of the refund over £10,800 (if there is any such remainder).

Tax years 2010/11 onwards

The rate of the tax charge for a short service refund lump sum made in the 2010/11 tax year or in a later tax year is

• 20% in respect of the first £20,000 refunded, and
• 50% in respect of the remainder of the refund over £20,000 (if there is any such remainder).

The Treasury can amend these rates and the threshold by order.

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.

Interest

Any interest paid on the lump sums (provided it is reasonable, and meets the required definition) will be a scheme administration member payment - see RPSM09104740.

If the payment is not reasonable any excess over what would have been a reasonable amount will not be a scheme administration member payment and, presuming that excess amount does not meet any of the other definitions of authorised member payments, will represent an unauthorised member payment. RPSM04104020 and RPSM04104040 deal with the taxation of such payments.