Unauthorised payments: what is an unauthorised payment?
What is an unauthorised payment?
Section 160 Finance Act 2004
The tax rules specify the conditions that need to be met for payments to be authorised. Any payment that doesn’t meet these conditions is an unauthorised payment. Specifically, an unauthorised payment is a payment made to or in respect of a person who is or has been a member or sponsoring employer and is neither:
- an authorised member payment, nor
- an authorised employer payment.
Payment in this context has a broad meaning. More information on the meaning of payment can be found at PTM026000.
Unauthorised payments fall into two categories:
- unauthorised member payments, and
- unauthorised employer payments.
What is an unauthorised member payment?
Section 160(2) Finance Act 2004
An unauthorised member payment is:
- a payment by a registered pension scheme to or in respect of a member, or former member of that pension scheme that is not an authorised member payment, or
- anything which is specifically treated as being an unauthorised payment to or in respect of a member or former member under Part 4 of Finance Act 2004 .
An important point to remember is that the member or former member does not have to receive the payment for it to be an unauthorised member payment. A payment could, for example, be made to some other individual or another pension scheme. As long as the payment is made to or in respect of a member or former member it may be classed as an unauthorised member payment. See PTM027000.
Common examples of unauthorised member payments are:
- continued payment of pension after the member’s death not covered by a term certain guarantee
- distributions made to a member before their minimum pension age, other than for serious ill-health or an authorised refund of contributions.
Deemed unauthorised member payments
An unauthorised member payment may also be deemed to have been made by a registered pension scheme in certain circumstances, as set out in the legislation. Find details about these from PTM133100 but the circumstances include:
- value shifting involving pension scheme assets
- acquisition of taxable property by the pension scheme
- recycling of pension commencement lump sums.
Interaction with lifetime allowance
The payment of an unauthorised member payment does not trigger a lifetime allowance test; it is not a benefit crystallisation event (BCE). So where the individual’s lifetime allowance has been exceeded, such a payment will not realise a chargeable amount. However, a BCE could arise at the time of any later authorised payments.
What is an unauthorised employer payment?
Section 160(4) Finance Act 2004
An unauthorised employer payment is:
- a payment by a registered pension scheme that is an occupational pension scheme to or in respect of a sponsoring employer, or former sponsoring employer, which is not an authorised employer payment, or
- anything which is to be treated as an unauthorised payment to a sponsoring employer, or former sponsoring employer, under section 181 of Finance Act 2004 (Value Shifting).
The definition covers not only payments to a sponsoring employer or former sponsoring employer, but also payments in respect of a sponsoring employer or former sponsoring employer. A payment could, for example, be made to a connected individual or company. So even if an employer or former employer does not personally receive the payment they can still be liable to an income tax charge in respect of the unauthorised payment. See PTM027000.
MR Ltd is a sponsoring employer in the MegaCo pension scheme. The pension scheme makes an unauthorised loan payment of £1 million to MegaCo Ltd, which is the parent company to MR Ltd. MegaCo Ltd does not have any employees and is not a sponsoring employer in the pension scheme. Even though MR Ltd has not received the £1 million payment it is a payment made in respect of MR Ltd. So the £1 million payment is an unauthorised employer payment and MR Ltd is liable to an unauthorised payments charge and, possibly, the unauthorised payments surcharge in respect of the payment.
Find more details and examples of specific unauthorised employer payments at PTM133100.
Deducting the scheme sanction charge from an unauthorised payment
Section 160(4A) and (4B) Finance Act 2004
Where an unauthorised payment has been made but has been reduced because an amount is withheld in anticipation of a scheme sanction charge, the amount of the unauthorised payment is treated as increased by the amount of the deduction for the scheme sanction charge. For example, the unauthorised payment would have been £100 but £60 is paid because an amount of £40 has been withheld to cover the scheme sanction charge. The unauthorised payment is still treated as £100 and the tax charges related to the unauthorised payment are based on the £100 amount.
If the scheme sanction charge turns out to be less than the amount withheld then any subsequent payment of the balance to the recipient of the unauthorised payment within 2 years of the date of the unauthorised payment is not treated as an unauthorised payment nor a scheme chargeable payment.
This applies for both unauthorised member payments and unauthorised employer payments.