Payments made outside the tax rules are classed as unauthorised and tax charges are payable.
What is an unauthorised payment?
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.
Common examples of situations where payments are classed as unauthorised include:
- trivial lump sums in excess of £30,000
- continued payments of pension after the member’s death
- when a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member
- most lump sum payments to cash-in or access pension funds before age 55 except when:
- the member retires due to ill health
- if before 6 April 2006 the member had the right under the pension scheme to take their pension before age 55
Certain movements of pension funds within a pension scheme are also classed as unauthorised payments.
Unscrupulous firms are using misleading information to promote personal loans or cash incentives and enticing savers to unlock their pension pots early. Very often these firms say there is a legal loophole they can use so you don’t pay tax. There is no legal loophole and these transactions are unauthorised payments.
Tax charges on unauthorised payments
Unauthorised payments are subject to the 3 tax charges. These are the:
- unauthorised payments charge
- unauthorised payments surcharge
- scheme sanction charge
The unauthorised payments charge
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%.
The unauthorised payments surcharge
This is payable by the same person who is subject to the unauthorised payments charge. It’s usually due when:
- a member gets unauthorised payments of 25% or more of their pension pot in a year
- an employer gets unauthorised payments of 25% or more of the value of the pension scheme in a year
The rate of an unauthorised payments surcharge is 15%. This means with the unauthorised payments charge the total tax rate payable is 55%.
The scheme sanction charge
The scheme administrator must pay the scheme sanction charge on:
The rate of the scheme sanction charge is between 15 and 40% 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.
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.
Detailed technical guidance on the scheme sanction charge can be found in the Pensions Tax Manual.
Paying tax due on unauthorised member payments
Members can pay the unauthorised payments tax charge either by:
- getting the scheme to pay the tax using the mandating procedure
- completing a Self Assessment tax return
The mandating procedure
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 and Customs (HMRC). If the member completes the mandate the scheme administrator will pay:
- the unauthorised payment less the tax to the member
- the tax to HMRC giving details of the member’s, name, date of birth and National Insurance number
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.
Paying tax due on unauthorised employer payments
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:
- details of the scheme making the payment
- nature of the payment
- payment date
An employer that isn’t a company should report and pay the tax due on the unauthorised payment on their tax return using the form SA101 for additional information.
Paying the scheme sanction charge
The scheme administrator must report an unauthorised payment on an 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.