Pensions
...take a refund of their
There’s always a limit Employees can pay as much as they like into their pensions, but there are annual and lifetime limits on how much tax relief is available on pension contributions. In the tax year 2019/20 tax relief was available on pension contributions of up to 100% of earnings or a £40,000 annual allowance, whichever was lower – the limits for 2020/21 had not been published at the time of writing this article. Any contributions made over this limit do not attract tax relief and are subject to income tax along with the employee’s other income. However, unused allowances can be carried forward from the previous three years, as long as the individual was a member of a pension scheme during those years. Another point to note is that since April 2016 the annual allowance is reduced for individuals with an income of over £150,000, including pension contributions. For every £2 over £150,000 the annual allowance falls by £1, subject to a minimum annual allowance of £10,000. The MPAA As with most things in life, there is an exception. Individuals taking money from a defined contribution pension can trigger a lower annual allowance known as the money purchase annual allowance (MPAA). For the tax year 2019/20 the MPAA was £4,000. Unused MPAA cannot be carried over to another tax year. Whether the MPAA applies depends on how the pension pot is accessed; and as you might expect, the rules are complicated. The main circumstances for triggering the MPAA are: ● taking an entire pension pot as a lump sum or starting to take ad hoc lump sums from the pension pot ● putting the pension pot money into a flexible income product (also known as pension drawdown) and starting to take income ● buying an investment-linked or flexible annuity where the income could go down ● taking payments that exceed the cap from a pre-April 2015 capped drawdown plan. The MPAA will not usually be triggered by: ● taking a tax-free cash lump sum and buying a lifetime annuity that provides a guaranteed income for life that either stays level or increases
● taking a tax-free cash lump sum and putting the pension pot into a flexible income product (also known as pension drawdown) but not taking any income from it ● cash in small pension pots valued at less than £10,000. Lifetime allowance There is also a lifetime allowance, which in 2019/20 was £1,055,000. Any amount in the pension pot above the lifetime allowance is subject to a tax charge, which is a one-off charge of 25% if paid as pension or 55% if paid as a lump sum. The charge can be applied in either of the two ways or a combination of both depending on how the benefits exceeding the lifetime allowance are taken. Individuals with large pension pots need to monitor their savings closely to ensure they do not exceed this limit. The introduction of auto-enrolment caused problems for many individuals who had already accrued pension savings above the lifetime allowance when it was reduced in April 2016. However, these individuals can apply to protect their pension savings from tax charges, provided no further tax-relieved pension contributions are made. Where an employer has reasonable grounds to believe that the member of staff has this protection, then the employer can choose whether or not to put them into a pension scheme or to re-enrol that member of staff.
contributions being taken ● they have less than thirty days of service when they leave employment. How are pension refunds processed? Pension refunds can be processed in two different ways: ● directly via payroll if contributions have not yet been invested to the pension scheme administrator, or ● directly from the pension scheme administrator. It is an employer’s responsibility to provide the scheme administrator information to an employee if a refund needs to be processed directly from the scheme. contributions, but this also has tax implications...
Contribution refunds If members ask to leave a pension
scheme, the rules may allow them to take a refund of their contributions, but this also has tax implications, depending on how the contributions were made. Contributions refunded from a defined benefit or money purchase pension scheme are taxed at 20% on the first £20,000 and at 50% on the remainder. The amount an individual will receive back from a personal pension or stakeholder pension scheme is the contributions that have been paid, net of basic rate income tax relief. In a NPA scheme where the contribution is taken before tax, the contributions have reduced the taxable pay. Therefore, a pension refund should increase taxable pay ensuring that tax is paid on the pension refund. Tax calculations must be based on the gross pay including the pension refund which will reverse the tax treatment received when the contribution was deducted initially. Any refund of RAS contributions can be added to the employee’s net pay as they did not attract any tax relief when they were initially deducted so the amount deducted from the employee was a net amount.
Refunds to scheme An employee may be able to get a pension scheme refund if:
● they have been automatically enrolled into a workplace pension scheme and have opted out within a month of their first
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| Professional in Payroll, Pensions and Reward |
Issue 59 | April 2020
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