Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

PAYE Manual

From
HM Revenue & Customs
Updated
, see all updates

Reconcile individual: in-year reconciliation: Flexibly accessed pension rights

For in-year repayment claims in respect of higher rate tax deducted from redundancy lump sum payments, see the guidance included within action guide ‘Request for in-year repayment on receipt of of redundancy payment’ available on the Personal Tax Operations Guidance Gateway.

For in-year repayment claims in respect of cessation repayments refer to PAYE94025.

For in-year repayment claims in respect of small pension taken as a lump sum payment (formerly known as trivial commutation) refer to PAYE94045.

For in-year repayment claims in respect of Lump Sum Death Benefit payments refer to PAYE94058.

For step by step instructions on how to action an in-year repayment claim following Flexibly Accessed Pension Rights on claim forms P50Z, see the guidance included within action guide ’Deceased Return Capture’ and on claim forms P53Z or P55 see action guide ‘Request for in-year repayment – P53 / P53(Z) / P53Z(DB) / P55 / P55(DB)’ both action guides are available on the Personal Tax Operations Guidance Gateway.

Background

From April 2015, new rules around pension flexibility will allow more individuals to opt to take one off or irregular payments rather than receiving a fixed regular income from their pension fund. This could be one or more payments for a year for a number of years, several payments a year over a shorter timeframe or the full value of the fund could be taken in one payment.

Regardless of the form in which these payments are taken, they will be taxed as a pension income and the normal PAYE rules will apply to them.

People will counted as flexibly accessing their pension if they receive any of the following on or after 6 April 2015:

  • a payment from a flexi-access drawdown fund, including a payment from a capped drawdown fund that would breach the cap
  • an uncrystallised funds pension lump sum (UFPLS)
  • a payment under a flexible annuity contract
  • a payment of a money purchase scheme pension where the scheme has fewer than 11 other pensioner members and they became entitled to the scheme pension on or after 6 April 2015
  • a stand-alone lump sum from a money purchase arrangement where the individual was entitled to primary protection but not enhanced protection, that is where Circumstance A in article 25B(2) of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 applies

In addition any person who had a valid notification for flexible drawdown before 6 April 2015, will be deemed to have flexibly accessed their rights at the start of 6 April 2015.

Pension flexibility: PAYE

Normal PAYE rules will apply to these payments. Where the fund is not extinguished with the first payment it will be treated as an ongoing PAYE source.

If a member has a P45 from a previous source / employment dated on or after 6 April in the current year, the scheme administrator will operate the code on the P45 on a Month 1 basis. We will issue a tax code to operate against future payments.

If a scheme administrator already makes payments to a member and has a tax code for those payments, the tax code should only be used for additional payments if the payments are being made at the same time. If more than one payment in a month is made and the same tax code is operated against each of those payments it could give the benefit of the tax allowances and rate bands twice.

In all other circumstances, including where individuals have a P45 from the previous tax year, the scheme administrator will use the emergency tax code on a month 1 basis against the first payment and we will issue a tax code to operate against future payments.

Where the fund is extinguished the scheme administrator will issue a P45 which will enable the member to claim any tax refund that might be due in-year. Where a member decides to receive their money over more than one payment for example in five annual payments, the P45 should only be issued once the final payment is made.

Pension flexibility: In-year repayments

The process for members to claim an in-year repayment in circumstances where funds have been fully extinguished mirrors the in-year trivial commutation repayment process.  Members who have not emptied their pension pot are also able to claim an in-year repayment.

Here are the three scenarios to illustrate how the process will work:

Scenario 1 - P50Z Member withdraws all of their pension pot and has no other existing PAYE/Pension income or is only in receipt of state retirement pension

  • the scheme administrator deducts tax from the payment using the emergency tax code on a week 1 / month 1 basis, the code from a previous P45 or a code issued by HMRC
  • the member can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P50Z see guidance included within action guide ‘Deceased Return Capture’ on the Personal Tax Operations Guidance Gateway.

Scenario 2 - P53Z Member has withdrawn all of their pension pot and has one or more existing employments and / or multiple pensions

  • the scheme administrator deducts tax from the payment using the emergency code on a week 1 / month 1 basis, the tax code from a previous P45 or a code issued by HMRC
  • the member can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P53Z

Scenario 3 – P55 Member does not withdraw all of their pension pot

  • the scheme administrator deducts tax from the payment using the emergency tax code on a week 1 / month 1 basis, the code from a previous P45 or a code issued by HMRC
  • the member can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P55
  • where a repayment of tax is made a new tax code will be issued to the administrator to ensure that any future payments have the correct tax code operated

In all of the scenarios, if no contact / repayment request is made we will automatically review the position after the end of the tax year and issue a tax calculation to the customer detailing any over or underpayment of tax.

Claims using estimated income near the end of the tax year

Claims received leading up to and shortly after the end of the tax year should be dealt with as normal using the estimated figures that have been provided.  This will avoid delays in the individual receiving their repayment and will avoid unnecessary contact with the employer.

Claims with a live employment source

Claims can be actioned during a tax year when there is a live employment.  Please ensure the estimated pay is entered for all open employments.

SA cases

Before you make any repayment, you should determine the customer’s tax position.

If the individual has a live SA interest or they satisfy the SA criteria in that the total taxable income before allowances are set off exceeds £100,000

You should:

  • calculate the repayment due manually, where there are ongoing sources of income, the tax the customer will continue to pay will need to be taken into account in the calculation
  • issue a SA return for the year of the claim
  • create a free standing credit on SA
  • where the customer has not emptied their pension pot issue a new tax code to the pension provider to ensure allowances are fully removed from the source, so that the correct tax code is operated against any future payments.  Set the manual code indicator

For cases where a cessation repayment claim is made on the basis that the customer has become self employed and the claim is made prior to an SA record being reactivated or set up, you must deal with the claim before reactivating or setting up the SA record.

For cases where a cessation repayment claim is made on the basis that the customer has become self employed and the claim is made after an SA record has been reactivated or set up, you will be unable to process the claim on NPS and you should:

  • amend the P45 part 1 figure on the NPS record if you hold details of a lump sum termination / redundancy payment which is not reflected in the P45 part 1 figure, for example, if details of the payment have been provided in a letter rather than on the P45
  • calculate the repayment due manually by using the SEESR37 PAYE Calculator
  • issue the R37 SEES calculation to the customer along with a note explaining that a repayment in respect of the overpayment will follow
  • deal with the repayment by creating a freestanding credit on the SA record (SAM1100082 refers)

For cases where you need to set an NPS repayment against an SA charge, see PAYE91090

Individual is a non-resident

The customer should initially be referred to to determine whether to make a claim for Double Taxation treaty relief.  If no relief due, consider completing form R43 - ‘claim to personal allowances and tax repayments by an individual not resident in the UK if UK Personal Allowances due’.

If the individual contacts you, refer to PAYE81000

Sources of evidence

The following are sources of evidence to support an in-year cessation repayment for a flexible pension payment

  • form P45 (see action guide ‘In-year Reconciliation – missing leaver FPS / P45 details’) for details of the checks that you must make before accepting a form P45
  • Real Time Information pay and tax details for the Pension Flexibility payments where no P45 is available

Personal Allowance

Following the in-year repayment, all or some of the personal allowances will have been used for the year.  Set the manual code indicator to ensure duplicate repayments or cumulative codes are not issued.

P53Z – The current tax codes will be reviewed as part of issuing the in-year refund.  If new employments or pensions start later in the year, the codes will need further review at that time.  The end of year reconciliation will calculate any underpayment of tax arising from any duplication of allowances.

P55 – No other on-going sources

Where the Personal Allowances have been fully used in the manual calculation, issue 0T week 1 / BR week 1 / D0 week 1 /D1 week 1 to ensure a duplicate repayment is not made by the pension provider.

Where the Personal allowances are not fully used in the manual calculation, the code should be restricted by inserting ‘Other Income’ (the allowances used in the manual calculation) in IABD and issuing the remaining allowances on a week 1 / month 1 basis.  To avoid the customer incorrectly being set up in SA, you should remove the ‘Other Income’ in IABD but not issue a further code.

P55 – Other on-going sources

Where the Personal Allowance will be fully used in the manual calculation:

  • by other sources, issue 0T week 1 / BR week 1 / D0 week 1 to the drawdown source to ensure a duplicate repayment is not made by the pension provider
  • not by the other sources, issue 0T week 1 / BR week 1 / D0 week 1 to the drawdown source to ensure a duplicate repayment is not made by the pension provider.

Where the Personal Allowances are not fully used in the manual calculation, the code should be restricted by inserting ‘Other Income’ (the allowances used in the manual calculation) in IABD and issuing:

  • if employed, the remaining allowances to the employments and code the drawdown BR week 1 / month 1 basis
  • otherwise, any needed allowances to any other pensions, and the drawdown using the balance of allowances on a week 1 / month 1 basis.

To avoid the customer incorrectly being set up in SA, you should remove the other income in IABD but not issue a further code.

Estimated benefits figures can be used for in-year repayments where employment related benefits are included in the code and the benefits do not fluctuate greatly from year to year.  Where an in-year cessation repayment is requested you should apportion the benefit details to the date of leaving; with the exception of medical benefit which should only be apportioned if you have information that it should be.  If appropriate remove the benefits from CY+1.  This will relieve the burden on employers, as you will only need to ask the customer to contact their employer for details if the benefits fluctuate greatly from year to year.

Pension flexibility: PAYE treatment of trivial commutation and small pots lump sums

From April 2015 only Defined Benefits (DB) pension schemes will be able to make trivial commutation payments. The current ‘basic rate’ regime will remain unchanged so that pension providers will continue to deduct tax at the basic rate from these lump sums before paying them.

The tax treatment of small pots lump sums will be continue unchanged. They will continue to be payable from both money purchase and DB pension funds and pension providers will continue to deduct tax at the basic rate from these lump sums before paying them.

See PAYE94045