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HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
Updated
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Return of surplus employee additional voluntary contributions (2005-06 and earlier)

Section 623 ITEPA 2003

Note: with effect from 6 April 2006, most existing tax approved pension arrangements became registered pension schemes. Section 623 has been repealed and does not apply to 2006-07 and later years.

Members of retirement benefits schemes can boost the pensions they will receive by making additional voluntary contributions (AVCs). They may make AVCs to their employer’s scheme or to a separate free-standing AVCs scheme. If HMRC approves these schemes, the member is entitled to tax relief on the payments and the investment income of the scheme is exempt.

If a scheme does particularly well it is possible for the total benefits available to a member to exceed the maximum benefits permitted under the approval rules. The scheme administrator then has to return surplus AVCs to the member. In paying back the surplus the administrator has to deduct a special tax charge (see Section 599A(2) ICTA 1988) designed to recover the tax relief in respect of both the AVCs and the investment income.

Section 623 ITEPA 2003 imposes a charge to tax on the employee to whom or for whose benefit the payment is made. The amount chargeable as pension income is the total amount or value of the payments made in the year grossed up by reference to the basic rate for that year. The employee is treated as having paid income tax at the basic rate on the amount chargeable. This tax is not repayable.