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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Contributions: the nature of contributions: introduction

Glossary PTM000001
   

 

Form of contributions
Pension credit rights from non-registered pension schemes
Transfers of certain shares from Save As You Earn (SAYE) option schemes or share incentive plans
Giving effect to cash contributions

 

Form of contributions

Tax relief is given on contributions “paid” during a tax year. This means that contributions to a registered pension scheme must be a monetary amount, for example, in cash, cheque, direct debit and bank transfers.

Notwithstanding this there are specific rules that provide that the transfer of certain shares to a registered pension scheme by a member will count as a tax relievable contribution.

Payments that are contributions

Sections 188(4) and 195 Finance Act 2004

The following payments are treated as a contribution (or potential contribution) paid by or on behalf of the member:

  • pension credit rights from a non-registered pension scheme - (see below for more information).
  • transfers of certain shares in a SAYE option scheme or share incentive plan - (see PTM122000 for more information).

Payments not regarded as contributions

Sections 188(5)(a) and 188(4) Finance Act 2004

The following payments are not treated as contributions paid by or on behalf of the member:

  • transfers from pension schemes

A transfer of funds from any other pension scheme into a registered pension scheme is not a contribution to a registered pension scheme. ‘Transfer’ means a direct payment or transfer of assets representing the same individual’s accrued rights or funds.

  • pension credit rights from a registered pension scheme

A pension credit received from another registered pension scheme is not a contribution. The pension credit will already have benefited from tax relief in the registered pension scheme from which the rights have been transferred.

Pension credit rights from non-registered pension schemes

Section 188(4) Finance Act 2004

An individual, within a registered pension scheme, may acquire rights to benefits from a pension credit. This is where rights are derived from a pension sharing order or provision following nullity of marriage, divorce or dissolution of a civil partnership. Such pension credit rights that come from a pension scheme that is not a registered pension scheme increase a member’s rights under a registered pension scheme. They will not previously have benefited from tax relief and so are treated as a contribution on behalf of the member. The member may claim relief on them up to the annual limit on relief.

Pension credits derived from registered pension schemes are not regarded as relievable pension contributions.

A pension credit means the amount that corresponds to the amount of a pension debit (i.e. the amount by which the value of a person’s shareable rights in a pension arrangement is reduced by a pension sharing order or provision).

Example

In carrying out a pension sharing order, the administrator of a non-registered pension scheme values the member’s shareable rights at £200,000. The pension sharing order specifies an amount of 50% of the value of the member’s benefit rights to be transferred to the ex-spouse. This gives a pension debit of £100,000 in relation to the member’s benefit rights and a corresponding pension credit of £100,000 in respect of the ex-spouse.

The pension credit is transferred to a registered pension scheme to provide pension benefits for the ex-spouse. The amount transferred - £100,000 - constitutes a relievable pension contribution for the tax year in which the pension credit is transferred.

In the same year that the pension credit is transferred the ex-spouse has relevant UK earnings of £50,000 and had paid pension contributions of £5,000 to a registered pension scheme. The ex-spouse can claim tax relief on £45,000 of the pension credit (£50,000 earnings less £5,000 contributions already made).

They may also face an Annual Allowance charge - see PTM050000.

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Transfers of certain shares from Save As You Earn (SAYE) option schemes or share incentive plans

Section 195 Finance Act 2004

The transfer of certain shares by a member into a registered pension scheme can be treated as a contribution on which tax relief may be given.

The shares must be shares:

  • which the member acquired on exercising a right under a SAYE option scheme (as defined in section 516 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) or
  • which were appropriated to the member under the provisions of a share incentive plan (as defined by section 488 ITEPA 2003).

The shares must be transferred to the pension scheme within a set period. This is:

  • for shares in a SAYE option scheme 90 days after the member exercised their right to acquire the shares, and
  • for shares in a share incentive plan 90 days after the member directed the trustees of the share incentive plan to transfer ownership of the shares to the member.

The value given to the contribution for tax relief purposes is the market value of the shares at the date they were transferred to the pension scheme.

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Giving effect to cash contributions

As explained above, contributions to a registered pension scheme must be a monetary amount. However, it is possible for a member to agree to pay a monetary contribution and then to give effect to the cash contribution by way of a transfer of an asset or assets.

For example, if a member wishes to pay a contribution he cannot do this by merely saying ‘take this asset and whatever it is worth that is my contribution’.

There must be:

  • a clear obligation on the member to pay a contribution of a specified monetary sum, say, £10,000. This needs to create a recoverable debt obligation
  • a separate agreement between the scheme trustees and the member to pass an asset to the scheme for consideration.

If the scheme agrees, the cash contribution debt may be paid by offset against the consideration payable for the asset. This is the scheme effectively agreeing to acquire the asset for its market value.

If the asset’s market value is lower than the contribution debt the balance will be paid in cash.

If the cash contribution debt is not created, then the transaction is the acquisition of an asset by the scheme not a contribution.

If the contribution is being made to a registered pension scheme that operates relief at source (RAS) the amount of cash contribution specified should, if applicable, be the net amount after the individual exercises his right to deduct from the payment the relevant rate of tax (see PTM044220). The relief at the relevant rate can be claimed by the scheme administrator in the normal way from HMRC and if appropriate the individual can claim higher rate relief via their self-assessment return.