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HMRC internal manual

Pensions Tax Manual

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Unauthorised payments: the scheme sanction charge: essential principles

Glossary PTM000001
   

The scheme sanction charge - scheme chargeable payments
Amount of the scheme sanction charge
Discharge of liability on ‘good faith’ grounds
Liability and reporting
Relief from liability following Court or Pensions Regulator intervention
Deducting the scheme sanction charge from an unauthorised payment
Examples of the scheme sanction charge

The scheme sanction charge - scheme chargeable payments

Sections 239 to 241 Finance Act 2004

The making of any unauthorised payment will also lead to a separate charge to income tax on the scheme administrator called the scheme sanction charge, unless the payment falls within narrowly defined exemptions. These exceptions to what are otherwise known as scheme chargeable payments are set out in PTM135200 and PTM134600

Amount of the scheme sanction charge

Section 240 Finance Act 2004

The rate of charge on the scheme administrator is 40%, although some credit will be given against this charge taking into account any unauthorised payments charge actually paid (but not any unauthorised payments surcharge), as follows:

  • The amount of the scheme sanction charge in any tax year is 40% of the total scheme chargeable payments made by the scheme in that tax year.
  • Where a scheme chargeable payment is an unauthorised payment and the unauthorised payments charge has been paid for that payment the amount of scheme sanction charge due is reduced.
  • The amount of the reduction is the lower of

    • the amount of the unauthorised payments charge that has been paid, or
    • 25% of the scheme chargeable payments that are ‘tax paid’.
  • A scheme chargeable payment is ‘tax paid’ if all or part of the unauthorised payments charge due has been paid.

This credit or deduction to the charge cannot reduce the scheme sanction charge below 15% of the unauthorised payment (so the deduction cannot be more than 25% of the unauthorised payment). As such, where a scheme sanction charge arises, the effective total rate of charge on an unauthorised payment would be 55%. This will comprise of a 40% unauthorised payments charge and, assuming this charge is paid in full, a 15% scheme sanction charge (payable by the scheme administrator). In addition there may also be a 15% unauthorised payments surcharge.

The amount of the scheme sanction charge may be reduced or completely exempted for an unauthorised member payment where that payment relates to rights built up, or contributions paid, before 6 April 2006 - see PTM134200

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Discharge of liability on ‘good faith’ grounds

A scheme administrator can apply to HMRC to have their scheme sanction charge liability discharged in certain circumstances - see PTM135400

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Liability and reporting

The scheme administrator is liable for the scheme sanction charge and effectively reports it to HMRC by way of reporting unauthorised payments and certain scheme chargeable payments on an Event Report. Exceptionally, some changes in this liability can apply - see PTM135300

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Relief from liability following Court or Pensions Regulator intervention

A scheme administrator can claim relief from the scheme sanction charge where an amount is paid back (or transferred) to the scheme in specified circumstances. PTM135400 gives more information.

Similarly, a scheme administrator appointed by the Court or the Pensions Regulator may not be liable for scheme sanction charges arising before their appointment - see PTM135400

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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.

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Examples of the scheme sanction charge

Example 1 - Unauthorised payment not reduced by amount to take account of the scheme sanction charge

The KB pension scheme makes an unauthorised payment of £4,000.

The amount of the unauthorised payments charge is £1,600. This is paid by Kevin, who received the unauthorised payment.

The unauthorised payment is also a scheme chargeable payment and so triggers a scheme sanction charge. The amount of the scheme sanction charge is £1,600 (40% of the £4,000 scheme chargeable payment).

As Kevin has already paid the unauthorised payments charge the liability to the scheme sanction charge is reduced. The reduction is the lower of:

  • £1,000 (25% of the amount of the £4,000 scheme chargeable payment), and
  • £1,600 (the amount of the unauthorised payments charge that has been paid).

The liability to the scheme sanction charge is reduced by £1,000.

So the amount of the scheme sanction charge that has to be paid by the scheme administrator of the KB pension scheme is £600.

Example 2 - Unauthorised payment reduced by amount to take account of the scheme sanction charge

The ABC pension scheme intends to make an unauthorised payment of £10,000 to Alan, a scheme member.

An amount of £4,000 is withheld from the unauthorised payment in respect of the scheme administrator’s possible liability to the scheme sanction charge at a rate of 40%. The balance of £6,000 is paid to Alan.

Alan reports an unauthorised payment of £10,000 on his self-assessment return. This is because the amount of the reduction, £4,000, from the intended payment of £10,000 is treated as part of the payment received by Alan. Alan pays the unauthorised payments charge of £4,000 to HMRC.

As Alan has already paid the unauthorised payments charge the liability to the scheme sanction charge is reduced. The reduction is the lower of:

  • £2,500 (25% of the amount of the £10,000 scheme chargeable payment), and
  • £4,000 (the amount of the unauthorised payments charge that has been paid).

The liability to the scheme sanction charge is reduced by £2,500.

So the amount of the scheme sanction charge that has to be paid by the scheme administrator of the ABC pension scheme is £1,500.

The scheme administrator then pays £2,500 to Alan within 2 years of the original unauthorised payment. This further payment is not an unauthorised payment and is not a scheme chargeable payment.