Taxation of public service pension reform remedy
Published 27 October 2021
© Crown copyright 2021
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/taxation-of-public-service-pension-reform-remedy/taxation-of-public-service-pension-reform-remedy
Who is likely to be affected
Individuals who were members of public service pension schemes on or before 31 March 2012 and at any time between 1 April 2015 and 31 March 2022 are likely to be affected.
Pension scheme administrators of public service pension schemes and public service employers are also likely to be affected.
General description of the measure
This measure provides for technical updates to pensions tax legislation. The measure will provide a power to make detailed technical changes in secondary legislation to ensure smooth implementation of the remedy to the unlawful age discrimination found in public service pension schemes (the ‘McCloud’ case) after the 2015 public service pension reform.
Policy objective
To support the government’s objective of a system of pensions tax relief that is fair, affordable and sustainable, by modifying existing legislation to mitigate the impact on individuals affected by the age discrimination identified in the 2015 public service pension schemes (the ‘McCloud’ case).
Background to the measure
The response to the Public service pension schemes consultation: changes to the transitional arrangements to the 2015 schemes, set out how the government is seeking to address the age discrimination identified as a result of these changes, including how increases in pension entitlement in past years will be treated for tax purposes.
At Tax Policies and Consultations Day Spring 2021, the government announced its intention to make technical updates to pension tax rules. These updates will remove anomalies that were identified while finalising the remedy for the age discrimination found in the 2015 public service pension reforms.
This measure will apply to all individuals affected by the 2015 age discrimination in public service pension schemes and relates to compensation an individual may receive.
Other legislative changes are required to deal with the retrospective nature of the changes being made under the Public Service Pensions and Judicial Offices Bill. This is because the Part 4 of Finance Act 2004 applies to pensions tax issues in the current tax year and does not currently apply to changes made in respect of past pension provision.
Detailed proposal
Operative date
This measure will have effect from 6 April 2022.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 and are set out in Part 4 of the Finance Act 2004.
Proposed revisions
The public service pension reforms remedy will be set out in the Public Service Pensions and Judicial Offices Bill.
Legislative changes are required to ensure that the remedy will be provided under the Public Service Pensions and Judicial Offices Bill can work retrospectively.
This measure will provide a power in the Finance Bill 2021-22 to make detailed technical changes in secondary legislation. For example, provision will be made regarding:
- providing an exemption to a tax charge on the compensation an individual may receive if, following the remedy, they are owed money
- allowing an individual to protect their pension rights from lifetime allowance charges calculated on the higher of the two pension choices available to them
- additional annual allowance to be available so that an individual will not pay more annual allowance charge than they would have done if they had accrued their chosen benefits in the relevant tax years
- where a scheme has paid lifetime allowance or annual allowance charges on behalf of the individual, but that accrual is now under a different scheme, for the payment to be deemed to have been paid by the latter scheme, and
- ensuring that payments of pensions and lump sums that would have been authorised payments had they been made at the relevant time, are treated as meeting the conditions to be authorised
Summary of impacts
Exchequer impact (£m)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| — | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
This measure is expected to impact individuals who were members of public service pension schemes on or before 31 March 2012 and at any time between 1 April 2015 and 31 March 2022. Specifically, by exempting them from the tax that may be due on the compensation they receive and introducing secondary legislation to as far as possible, put them in the tax position they would have been in had they always had the pension provision they finally receive.
Customer experience is expected to remain broadly the same as the Public Service Pensions and Judicial Offices Bill seeks to limit the administrative burden on individuals and it does not alter how individuals interact with HMRC.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
Men are more likely to be impacted by this measure as they are more likely to be higher earners and therefore more likely to incur annual allowance and lifetime allowance tax charges.
Individuals affected by this will be less likely to be from ethnic minority groups or the disabled.
Those who benefit are more likely to be younger in age.
No other impacts are anticipated in respect of groups sharing other protected characteristics.
HM Treasury has published an Equality Impact Assessment alongside the Public Service Pensions and Judicial offices Bill.
Impact on business including civil society organisations
While the remedy set out in the Public Service Pensions and Judicial Offices Bill is expected to have a significant impact on public service pension scheme administrators and public service employers, this measure is expected to have a negligible impact.
One-off costs will include familiarisation with the changes.
Continuing costs could include dealing with an individual’s remedy decision once they reach retirement.
Customer experience is expected to stay broadly the same as it does not significantly alter how the pension scheme administrators and public service employers interact with HMRC.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
There will be changes needed to online guidance on GOV.UK.
HMRC will also need to make changes to IT systems to support implementation of this measure. It is currently anticipated that it will cost HMRC in the region of £2 million to deliver these IT changes.
HMRC will also be delivering the compensation scheme application process as part of the McCloud remedy and this is expected to cost £8.6 million to build these additional IT systems and run the process.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Beverley Davies on Telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.