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 does not 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.
Scheme administrators must report all unauthorised payments on an event report for that scheme.
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 do not 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 did not 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 40% of the unauthorised payment, although some credit will be given against this charge where 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 cannot 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 would not 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 mandating procedure can only be used at the point that the unauthorised payment is made.
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 HMRC. If the member completes the mandate, the scheme administrator will pay the unauthorised payment, less the tax, to the member.
So that no further unauthorised payment arises on the member, the scheme administrator should pay the tax to HMRC straightaway and contact HMRC with the following details:
- member’s name
- date of birth
- National Insurance number
- tax year that the tax or unauthorised payment relates to
- date of unauthorised payment
- of the unauthorised payment
- of the unauthorised payment charge
- subject to the unauthorised payments surcharge
Other details that you should provide are:
- total tax withheld and paid across to HMRC
- date that the member’s charge was paid
- if payment included the scheme sanction charge, the amount of the scheme sanction charge
- if this information relates to a new unauthorised payment charge, or is an amendment to an existing unauthorised payment charge
The scheme administrator should contact HMRC if they want to provide details of multiple members.
The member does not 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.
If the member does not sign the mandate or the scheme does not use the mandating procedure, the member must report and pay the tax using Self Assessment.
Schemes do not have to offer the mandating procedure to their members but if they do, the scheme administrator must still report details of the unauthorised payments on their event report.
If the member’s unauthorised payment charge is paid from the scheme outside of the mandating procedure, this will be a further unauthorised payment. The scheme administrator must also report this additional unauthorised payment on the event report.
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 is not a company should report and pay the tax due on the unauthorised payment on their tax return using form SA101.
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 has not been paid 30 days after the due date.
Interest will be charged if the scheme sanction charge is not 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.
How to pay HMRC
If you’re a scheme administrator read the guidance on how to pay tax HMRC.