RACS Newsletter; Issue 2
More important information about the way retirement annuity contracts
in payment will be taxed
from april 2007.
In this second issue of our Newsletter we are providing more information on some of the issues which have emerged in our discussions and consultations with Providers. If you require more details at this stage or if you have further questions or issues, please email
The Topics covered in this Newsletter are;
- Background
- Contact Details
- Specification for Data Transfer
- Data testing facility & HMRC address for data to be sent to
- Data Encryption
- Central PAYE RACS Unit
- Pooled PAYE Schemes
- Separate PAYE schemes for Providers (where the provider is the payer)
- Separate PAYE schemes for each Payer (if different from Provider)
- Consequences for the payer of having a PAYE scheme.
- Annuities to be transferred to PAYE
- Trivial Commutations
- Multiple RACs paid to same annuitant
- De Minimis Limits
- Question and Answer updates
- HMRC RACs Information Leaflet for April 2006 issue
1. Background
As from April 2007 all regular payments made out of RACs will be taxed under PAYE. This will mean that from April 2007 every annuitant will pay the right amount of tax, and there will be no need for many of them to make repayment claims every year. It will also mean that Providers will no longer be required to maintain a separate tax accounting system for RACs.
2. Contact details
Whilst April 2007 is still 18 months away, there is a lot of preparatory work for both Providers and HMRC to undertake. So if you haven`t as yet confirmed that you are a RACs Provider, will you please let me know by email, to
before 31st October 2005.
The initial information required is;
- Provider Name, postal address, and telephone number.
- email contact name(s) and address .
- The approximate number of RACs which you currently have in payment .
3. Specification for data transfer
The final specification of how the annuitant data is to be transferred to HMRC in December this year, and how subsequent updates are to be made, was issued in August. If this specification creates any particular problems for you, and you have not already contacted me, please do so as soon as possible.
A further copy of the specification is attached to this Newsletter.
We are asking Providers to try and meet the 31st December 2005 deadline wherever possible, but we do realise that this is a busy time for the Industry, particularly with the April 2006 Pension Simplification changes to absorb as well. If you are unlikely to be able to let us have the initial data drop by December 05 could you please let me know as soon as possible so that we can agree on a convenient date.
Once you have provided the initial data of all RACs in payment at that date, you will need to let us have regular updates of changes until 5th April 2007. The frequency of the updates is for you decide, but most Providers are opting to do this either monthly or quarterly. The data for which we require updates will be;
- Dates of Cessations. ( mainly Death cases)
- New RACs coming into payment (including transfers on death to a spouse/sibling).
There is no need to advise us of changes to amounts of annuities paid, changes to addresses or status. We will be able to use our own data sources for these updates.
And we do need to know about any RAC “payment suspensions” which you put in place. So long as the annuitant has a legal entitlement to the RAC, even if it is suspended because you have no information to enable you to pay it, it should still appear as a RAC in payment on the data to be reported.
4. Data testing facility & HMRC address for data to be sent to
We are now able to provide a testing facility for your initial data. This
is to enable you to have the certainty that when you send your full data
files or spreadsheets, they can be accepted into our data bases.
The test data can either be emailed to me at Robin.Ward@hmrc.gsi.gov.uk,
or it can be posted or couriered to me at my office address at the head
of this newsletter. If it is posted please use registered post.
5. Data Encryption
We have had some enquiries about using data encryption ,are looking at the possibility of providing a standard encryption system for all data transfers. Further details about this will be issued as soon as possible. In the meantime, if you wish to encript any test data , please discuss this with Malcolm Slope (telephone 0870 238 8532),who will be able to advise as to whether your encryption system is one that we can use.
6. Central PAYE RACS Unit
We are planning to have a new single unit which will handle all of the RACs into PAYE transition work.(ie from December 2005 through to late 2007). Whilst this will be a different location from your existing PAYE Office, it will enable us to provide you with specialist support on any issues or problems which arise. We are aiming to have the Unit up and running by the end of December 2005 and it will have a dedicated helpline number for you to use.
The Unit will be attached to our Leicester and Northampton Large Processing Office , and further details about the address and contact details will be included in a future newsletter.
Some Providers have asked if they can either include the RACs in their existing Personal Pensions PAYE scheme, or have the new RACs scheme co lated in their existing Tax Office.
During the transition period it is essential that the RACs work is ring fenced so that we can control from a central point all of the work which is required. However, once the changeover has been successfully completed we will discuss with those Providers who prefer to have all of their PAYE co-located how and when this can be achieved.
7. Pooled PAYE Schemes
It has come to our notice during discussions around RACs, that there are many existing local agreements and practices between individual Pension Providers /Assurance Companies and HMRC Offices.
These allow Providers to ‘pool’ pension schemes for diffferent
“legal entities” under a single PAYE reference.
These arrangements create a PAYE scheme for an “entity” which
is not a “legal entity”, and as sucht is open to PAYE discrepancies
which can in turn create tax enforcement difficulties.
We are currently looking at how to resolve these issues across the whole
spectrum of PAYE schemes and not just within the Pensions and Annuities
segment.
More information will be provided as this process unfolds.
However, our initial RACs planning will not allow the option of pooling arrangements, and we will create a RACs PAYE Scheme for each “legal entity”. This means that where you are paying RACs on behalf of different companies, you will need to advise us of the respective names of each one (even if all communications are to come to you at a central address.)
You will also need to ensure that the data files which you will be sending, will enable us to identify each company and the RACs which are attached to it.
8. Seperate PAYE Schemes for each provider (where the provider is also the payer)
We will be setting up a new PAYE scheme for each of the RACs Providers for two reasons.
- The first being as outlined above. The RACs schemes will be on a basis of ‘one for one’ otherwise to introduce RACs recipients into the ‘Pooled’ schemes would simply exacerbate the problem.
- The second reason is that under RACs, a substantial number of individuals will be brought into PAYE for the first time. To ensure uniformity of treatment and to provide a specific level of Customer Care (to both annuitants and providers) we are creating a new PAYE Unit , with separate (new) PAYE references for each of the RACs providers.
If you have already provided contact details we will use that Provider name and address. If you have not yet contacted us, you should do so now.
We will also need details of any RAC Payers on whose behalf you are providing payments , because PAYE schemes will be needed for each of those Companies as well. See the following item for more details about these.
9. Seperate PAYE Schemes for each payer (If different from provider)
Some Providers have highlighted the situation where RACs in payment are not paid direct to the annuitants. The annuities are paid to a 3rd party, often the former employer, who then pays the annuitant.
Under PAYE regulations, the PAYE scheme must be operated in the name of the payer which means that separate PAYE schemes will be needed for each 3rd party payer. This may create extra work for both the provider and the payer, and if you have RACs in this situation you will need to discuss with the respective 3rd party payers what arrangements you need to put in place.
So that we can gauge the size of this problem will you please let me know as soon as possible if you have any of these annuities, and how you are proposing to handle them from April 2007.
10. Consequences for the payer of having a PAYE Scheme
If you do not already operate PAYE in another capacity, ie as an employer or as a pension provider, you will need to familiarise yourself of the obligations of an new employer as well as the operation of PAYE. If you fall into this category and you would like some help and advice please let me know. We can then arrange for one of our Business Support Teams to contact you.
11. Annuities to be transferred to PAYE
The change in the taxation rules will apply to all retirement annuity contracts (RACs) including all "old code schemes" as from April 2007. This will mean that the only annuities outside of PAYE will be purchased life annuities .
We are aware that there are a few peculiar annuities in existence which are paid under provisions such as "an office/post holder in perpetuity". If you have such arrangements where you do not have a named recipient and the operation of PAYE will create difficulties, please report those arrangements to me as soon as possible as well.
There are also some annuities paid under partnership deeds and arrangements by current partners to retired partners. These annuities are often paid out of the current partners share of the profits . These are not caught by the RACs legislation and should continue to be handled in the same after 5th April 2007 as at present.
These annuities should not be confused with arrangements where retired partners are receiving a RAC in respect of their own contributions paid into a scheme out of their own share of profits whilst they were active partners. These are often paid through a bespoke Friendly Society, and PAYE will need to operated in those situations.
12. Trivial Commutations
The new Trivial Commutation rules also apply to RACs , and it will therefore be possible for a RAC to be commuted from April 06, which is 12 months before the taxation of RACs in payment come into PAYE.
We will be providing guidance in later newsletters as to how PAYE should be operated against RACs commuted prior to April 2007. But it would be helpful to know if you are planning to offer or actively promote the opportunity for your annuitants to commute small RACS from April 2006.
13. Multiple RACs paid to same annuitant
There are 2 different ways in which you can handle the transfer into PAYE of annuitants who have more than one RAC in payment with the same Provider.
- Where ever possible we would like you to combine all RACs in payment into one record. This will mean that we only have to create one tax record and provide you and the annuitant with one tax code number.
- If your accounting systems do not enable you to do this and you have to maintain separate records for each RAC, you will need to include a separate data entry for each one. This will however mean that we will have to create a tax record for each annuity and provide both you and the annuitant with a different code number for each one.
It would be helpful when you send in your data files if you could indicate
in the covering memo whether multi RAC cases have been combined or are shown
separately.
14. De Minimis Limits
It has come to our notice during discussions around RACs, that there are many existing local agreements and practices between individual Pension Providers /Assurance Companies and HMRC Offices.
These are mainly applied to Personal Pensions and provide for a No Tax (NT) code number to be automatically applied by a Provider against any new personal pension coming into payment . HMRC will then undertake checks at the end of each tax year when the P35 and P14 forms are received.
Some of these arrangements have also been extended to RACs where small RACs can be deemed to be covered by a form R89, even when no form has been completed by the annuitant.
All of these arrangements are currently being reviewed and further information will be put in later newsletters when decisions are made.
In the meantime we havev taken the decision that no de minimis limits will be applied to RACs, either those currently in payment or those coming into payment . This means that you should include every RAC in payment on your data files, irrespective of the annual amount. HMRC will then let you have the correct code number in every case.
If you have any RACs in payment, which, for whatever reason, are already being taxed under PAYE, you should not undo those arrangements. Those RACs should be left under the PAYE scheme they are attached to, but they must not be included on your initial RAC data files to be sent later this year .
15. Question and Answer Updates
We have received a range of questions from Providers and where these cover an issue which is relevant to most Providers we will be publishing these on the internet and updating them on a regular basis. The first batch will be published later this month and will also bne emailed to those Providers who have given an email contact. If you have any questions,or want to be included on the email distribution list please email
16. HMRC RACS Information leaflet for April 2006 Issue
We are grateful to all of the Providers who have offered to include an HMRC information leaflet in their mailings in April/ May 2006. However, we have now decided that we can best manage this process by doing the issue ourselves. This does however mean that we are reliant on all Providers having subbmitted their initial data files well before that date!
If any Providers would still like to include their own information about the changeover in any mailings during 2006 , we are quite happy to provide text or approve text about our customer contact points etc.
Thankyou for your assistance.
Robin Ward
HM Revenue and Customs Central Policy
