As a condition of getting tax relief the government want pension schemes to use their funds to provide certain benefits, such as a pension for life. The tax rules define these benefits as authorised payments. Any other payment is classed as unauthorised and tax charges are payable.
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The tax rules specify the conditions that need to be met for payments to be authorised. Any payment that doesn't meet these conditions is an unauthorised payment. The pension you'll get when you retire and the tax free lump sum should be authorised payments because they should meet the payment conditions set by legislation.
Common examples of situations where payments are classed as unauthorised are as follows:
Certain movements of pension funds within a pension scheme are also classed as unauthorised payments.
Your scheme administrator should be able to tell you if you're in any doubt. Unauthorised payments are usually rare.
Unauthorised payments are subject to the following tax charges:
Where the unauthorised payment is made to or for a member, it's the member who's responsible for paying the tax charge - even if they didn't receive the payment. If the payment is made after the member's death the person who receives the payment is responsible for paying the tax.
Where the payment is made to or for an employer participating in an occupational pension scheme it's the employer who's subject to the unauthorised payments tax charge.
The rate of the unauthorised payments charge is 40 per cent.
This is payable by the same person who is subject to the unauthorised payments charge. It's usually due when:
The rate of an unauthorised payments surcharge is 15 per cent. This means with the unauthorised payments charge the total tax rate payable is 55 per cent.
The scheme administrator must pay the scheme sanction charge on:
The rate of the scheme sanction charge is between 15 and 40 per cent of the unauthorised payment and depends on whether or not the unauthorised payments charge has been paid. This means that unless the scheme pays the members' unauthorised payment tax using the mandating procedure the scheme administrator can't know in advance how much tax they'll have to pay. More in the section 'The mandating procedure' below.
A scheme administrator can apply to be discharged from the tax charge where it wouldn't be just and reasonable for them to pay the tax. This ‘good faith’ protection is aimed at situations where the scheme administrator has been misled or given incomplete information leading them to assume wrongly that the payment was an authorised payment.
Technical guidance on the scheme sanction charge
More about unauthorised borrowing and taxable property
Members can pay the unauthorised payments tax charge either by:
The scheme administrator asks the member to complete a mandate giving them authority to deduct the member's tax from the unauthorised payment and pay the tax to HM Revenue & Customs (HMRC). If the member completes the mandate the scheme administrator will pay:
The member doesn't need to do anything else.
By using the mandating process the scheme administrator will know in advance how much scheme sanction charge they'll have to pay. Schemes don't have to offer the mandating procedure to their members.
If the member doesn't sign the mandate or the scheme doesn't use the mandating procedure the member must report and pay the tax using Self Assessment.
If you normally complete a tax return, then tell HMRC about your liability to the unauthorised payments charge (and any surcharge) as part of the return. If you use a paper return, ask for the Additional information pages (SA101) to report the information.
If you haven't completed a tax return before (or it's been a while since you did), you'll need to register to get a tax return.
Registering for Self Assessment
A company must report all the following information to HMRC by 31 January following the end of the tax year in which the unauthorised payment was made:
An employer that isn't a company should report and pay the tax due on the unauthorised payment on their tax return. If you complete a paper return you'll also need form SA101 Additional information pages.
The scheme administrator must report an unauthorised payment on the Event Report. HMRC will work out the amount of tax due using information from the Event Report and any reports of tax paid using the mandating procedure. HMRC will then send the scheme administrator an assessment of the tax due.
The payment date for the tax is 30 days after the assessment notice is issued. Late payment penalties become payable if the tax still hasn't been paid 30 days after the due date.
Interest will be charged if the scheme sanction charge isn't paid by 31 January following the tax year in which the charge arose.
To avoid or minimise interest being charged scheme administrators can make payments on account.
