Guidance

Newsletter 156 — February 2024

Published 23 February 2024

Lifetime allowance abolition

We can confirm that the Finance Bill 2023-24, which contains legislation to complete the abolition of the lifetime allowance, passed through the House of Lords on Wednesday 21 February 2024, and will shortly receive Royal Assent.

As confirmed in pension schemes newsletter 155 any required amendments to the primary legislation will be made through regulations.

We’ll publish another lifetime allowance newsletter, with further information and guidance, in the next 2 weeks.

Pension scheme return

In pension schemes newsletter 155 we told you about the delay in implementing the new function to submit pension scheme returns on the Managing Pension Schemes service.

This delay will give you more time to collate and prepare the necessary information required to file your pension scheme return on the Managing Pension Schemes service for the 2024 to 2025 tax year.

To help you prepare for this, we’ve published pension scheme administrators guidance on what you need to know to complete a pension scheme return on the Managing Pension Schemes service.

Public service pensions remedy — tax treatment of interest

We’ve received a number of queries about the tax treatment of interest that arises under the public service pensions remedy, where the rate of interest that public service pension schemes have to pay under the remedy is set at 8% by either the:

• employment tribunal
• HM Treasury directions

The tax treatment of that interest will differ depending on the reason why the interest is being paid.

It must be calculated in its separate parts before it can be combined into one payment. Those parts are:

• interest on compensation paid under the Public Service Pensions and Judicial Offices Act 2022
• interest on authorised pensions
• interest on authorised top-up lump sums
• interest on unauthorised payments

Except where the interest is payable on compensation, the tax treatment will follow existing tax legislation.

Interest on compensation

Where interest is paid under a provision to pay compensation in the Public Service Pensions and Judicial Offices Act 2022, including interest on overpaid contributions, it is not taxable.

Regulation 44 of the Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023 (SI 2023/113) exempts compensation payments from income tax and capital gains tax.

The interest will be exempt from tax regardless of the rate at which it is paid.

Interest on authorised pensions

The arrears of pension will be taxable under PAYE (Pay As You Earn).

Existing tax treatment will apply to interest payable on those pension arrears. Detail on the tax treatment of that interest is in pension schemes newsletter 140, including information on the obligation of the payer of the interest to deduct tax and the allowances that an individual may have available.

Although it is explained in relation to guaranteed minimum pensions, the same principles apply to interest payable under the public service pensions remedy.

Interest on authorised top-up lump sums

Where due to the member’s choice the value of their lump sum benefit has increased the public service pension scheme is required to make a top-up lump sum payment.

Lump sum and interest paid separately

Where the interest is paid as a separate payment to the top-up lump sum, it is treated in the same way as interest paid on pension arrears.

Lump sum and interest payable within maximum limits

Interest paid on a top-up lump sum that is an authorised lump sum can be taxed in the same way as that lump sum if it is paid both:

• together with the top-up lump sum as one payment
• together with the original and top-up lump sums and it doesn’t exceed the maximum limit for the lump sum to remain an authorised payment

Lump sum and interest exceed maximum limits — scheme administration member payment

Where the single payment of the top-up lump sum and interest exceeds the maximum limit for the lump sum, then the excess is considered to be a scheme administration member payment. 

Interest payments that meet the definition of a scheme administration member payment are taxable as interest under section 369 Income Tax (Trading and Other Income) Act 2005. The full amount of interest arising in the tax year is chargeable to tax.

For pension arrears, interest will be taxable in the tax year in which it is paid. Pension schemes newsletter 140 gives further details on the taxation of interest including when scheme administrators are required to deduct tax, and the interaction with a member’s allowances. 

Example

The member retired three years ago.  As a result of the member’s immediate choice a further £10,000 lump sum, that is a pension commencement lump sum, is due.  The scheme is required to pay 8% simple interest of £2,400 on this top-up lump sum. 

The scheme makes a single payment of £12,400.

The member’s maximum possible pension commencement lump sum is £11,500.

From the £12,400 payment, £11,500 is classified as a pension commencement lump sum. 

The remaining £900 will be a scheme administration member payment.

The single payment of £12,400 is categorised and taxed as follows:

• pension commencement lump sum — £11,500
• scheme administration member payment — £900

Interest on unauthorised payments

Interest on unauthorised payments is itself an unauthorised payment. Interest payments that are unauthorised payments should be reported to HMRC under the normal processes for unauthorised payments.

You can find further guidance on unauthorised payments.