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PAYE Manual

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Reconcile individual: in-year reconciliation: Lump sum death benefits

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 employment 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 Flexibly Accessed Pension rights refer to PAYE94055.

For step by step instructions on how to action an in-year repayment claim following Lump Sum Death Benefit payment on forms P50Z(DB) see the guidance included within action guide  ’Deceased Return Capture’ or on form P53Z(DB) and P55(DB) ‘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

In the 2015 summer budget the government confirmed that from April 2016 taxable lump sum death benefits will be subject to tax at the recipients marginal rate of income tax, instead of the current flat rate 45% special lump sum death benefits charge (reduced from 55% by section 2 Taxation of Pensions Act 2014 (TPA 2014)).

Lump sum death benefits are taxable where the member dies aged 75 or over. Where the member was under age 75 at the time of death, the lump sum death benefit is tax-free, unless it is paid out more than 2 years after the scheme administrator became aware of the death. In these circumstances the payment is taxable at the recipient’s marginal rate.

Taxable lump sum death benefits that are paid to individuals will become their liability instead of the scheme administrator and be taxed as PAYE pension income.

Where taxable lump sum death benefits are paid to persons who are not individuals (such as a trust, or a company) scheme administrators remain liable to the special lump sum death benefits charge at 45%.

Taxable Lump Sum Death Benefit: PAYE

Normal PAYE rules will apply to these payments.

If an individual (dependents/beneficiary)  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 dependent/beneficiary 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 a one-off Lump Sum Death Benefit payment is received the scheme administrator will issue a P45 which will enable the member to claim any tax refund that might be due in-year.

Taxable Lump Sum Death Benefits: In year repayments

The process for dependents/beneficiaries to claim an in-year repayment in circumstances where a one-off Lump Sum Payment is received mirrors the in-year trivial commutation repayment process.  Dependents/beneficiaries who have received a flexibily accessed pension death benefit (e.g. beneficiaries flexi access drawdown) that is not a one-off payment are also able to claim an in-year repayment.

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

Scenario 1 –  P50Z(DB) Dependents/beneficiaries receives a one-off Lump Sum Death Benefit payment 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 dependent/beneficiary can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P50Z(DB) see guidance included within action guide ‘Deceased Return Capture’ on the Personal Tax Operations Guidance Gateway.

Scenario 2 – P53Z(DB) Dependents/beneficiaries receives a one-off Lump Sum Death Benefit payment 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 dependent/beneficiary can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P53Z(DB)

Scenario 3 – P55(DB) Dependents/beneficiaries who have received a flexibily accessed pension death benefit payment that is not a one-off payment

  • 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 dependent/beneficiary can contact HMRC after the payment has been received to claim a refund (in-year) by completing a repayment claim form P55(DB)
  • 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 Lump Sum Death Benefit payment

  • form P45 (seeaction 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 Lump Sum Death Benefit 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(DB) Individual has taken a one off lump sum death benefit payment and has other sources of income

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(DB) Individual has received a flexibily accessed pension death benefit payment that is not a one-off payment and has 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(DB) Individual has received a flexibily accessed pension death benefit payment that is not a one-off payment and has 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.

Lump Sum Death Benefit: 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