genuine errors – HMRC guidance for pension
Roderick Ramage BSc(Econ), solicitor
published by distribution to professional contacts on 30 July 2018
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
Finance Act 2004 divides payments and events treated as payments by registered
pension schemes into authorised and unauthorised payments and imposes
unauthorised payment tax charges on the latter, payable by the member or the
employer: Finance Act 2004 s160 (Payments by registered pension schemes) and
s208 (Unauthorised payments charge). The
tax is a flat rate 40% of the value of the unauthorised payment plus, in some
circumstances, a 15% surcharge: ib s209 (Unauthorised payments surcharge). If the unauthorised payments reach a set
amount in a set period, a scheme sanction charge is levied on the scheme
administrator of 40% of the payment, which can be reduced to 15% if the
unauthorised payment charge has been paid: ib s239 (Scheme sanction charge).
becomes aware of unauthorised payments and other matters, because the Registered Pension
Schemes (Provision of Information) Regulations 2006, made under the FA 2004,
s251 (Information: general requirements), requires the scheme administrator to
provide an event report in respect of reportable events, including unauthorised
principle originated in a note of less than half a page in HMRC’s Pension Tax
Simplification Newsletter 19 (30 September 2006) that certain payments of less
than £250 made in error would not be reportable in an event report or in the
taxpayer’s self-assessment form.
principle has been expanded and explained in more detail and is now published
in the Pensions Tax Manual. HMRC’s
manuals for internal guidance are published on-line and include the Pensions
Tax Manual. In PTM 01000, HMRC explains
that the PTM is written to help HMRC staff as well as assisting customers and
their advisors. The manuals are no more
than HMRC’s understanding of the law and guidance on how HMRC can be expected
to apply it. Although HMRC does not
express it in this way, the conditions relating to payments made in genuine
error, if met, operate in effect, as if the payments were not made. The general principle of genuine error is
stated in PTM146100 as follows.
An inadvertent payment made in the following circumstances will not
be an unauthorised payment:
the payment is made in genuine error, such that there
was no intention to make a payment to that extent or at all, and
the erroneous payment is spotted by someone involved
with the management of the scheme (or the recipient of the payment or the
recipient’s adviser might have brought the matter to the attention of the
scheme managers), and
the error is rectified as soon as reasonably possible.
There is no requirement for the scheme administrator to report a
payment made in these circumstances as an unauthorised payment, as the payment
is not an unauthorised payment for the purpose of the tax rules relating to
registered pension schemes.
The guidance in PTM146100 to 146800
(now about fifteen A4 pages) contains examples of circumstances in which the
principle applies, which one might assume are no more than examples and not
intended to be exhaustive. The
circumstances are not now limited to the original payments below £250 and
include other unauthorised payments, contributions which are not contributions
and some payments when a scheme is treated as having made a payment in
connection with an investment acquired with scheme funds
the examples of the principle in the PTM
If a member’s bank continues to pay
contributions after the member has cancelled them, the payments are outside the
member’s control and never intended to be made.
Therefore they are not contributions to the scheme and the refund of
them is not an unauthorised member payment.
In one case a member was taken to hospital seriously ill before he could
even contact his bank, but HMRC, which had been notified of the continuing
contributions, accepted that this was a genuine error and the member did not
lose his lifetime allowance protection.
A member’s maximum tax free pension
commencement lump sum is £25,000, but by
an accidental transposition of the figures the scheme pays £52,000. If the member repays the excess £27,000 to
the scheme immediately, the excess payment by the scheme is not an unauthorised
If a new employee had no intention of
joining the employer’s pension scheme or his application to join had been
rejected, but the employer deducts his contribution from his first salary
payment, the member queries it and the scheme returns the employer’s and the
member’s contributions, the returned contributions are not unauthorised
At the end of a member’s employment
his and the employer’s contributions should stop, but if the employer cannot
change its banking arrangement to prevent the payment of the contributions that
would have been paid to the scheme if the employment had not ended, the return
of those payments by the scheme would not be unauthorised.
In compliance with the FA 2004 s179
(Authorised employer loan), the scheme employer pays interest and instalments
of capital on a loan from the scheme by standing order, but, when the loan has
been discharged, the bank does not stop the standing order. When the mistake is discovered, the excess
payments repaid by scheme are not unauthorised payments.
If the scheme arranges to borrow money
on terms which comply with the FA 2004, s182 (Unauthorised borrowing: money
purchase arrangements), but the bank mistakenly deposits a larger amount, in
excess of the permitted limit, in the scheme’s account, and the excess
borrowing is rectified as soon as possible, the excess deposit is not an
unauthorised borrowing and the repayment to the bank (PTM 146800 mistakenly
says “to the employer”!) is not an unauthorised payment.
outside the principle
Not every unauthorised payment made as
a result of a genuine error can be disregarded.
If by a genuine error a member’s
pension commencement lump sum is not paid within the twelve months following
the date on which he becomes to it and the linked pension, it ceases to be a
pension commencement lump sum and it an unauthorised payment, because it is
known that it would be unauthorised when actually paid.
If contributions are paid on bad advice and are refunded on a
recommendation by the Financial or the Pensions Ombudsman, the refund is an
unauthorised payment, unless it is either a refund of excess contributions lump
sum or a short service refund lump sum, but there would be no scheme sanction
charge if made pursuant to an Ombudsman’s order. This exception from the genuine error
principle seems anomalous, as it appears to penalise a victim of mis-selling.
copyright Roderick Ramage
click below to