Guidance

Newsletter on the public service pensions remedy — August 2023

Published 18 August 2023

The Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) (No.2) Regulations 2023

In public service pensions remedy newsletter May 2023 we publicised the consultation on further draft tax regulations resulting from the remedy to the discrimination provided for in Part 1 of the Public Service Pensions and Judicial Offices Act 2022 (PSPJOA). We later published guidance on those further draft regulations. The initial regulations, the Public Service Pension Schemes (Rectification of Unlawful Discrimination)(Tax) Regulations 2023 — SI 2023/113, came into force on 6 April 2023.

The Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) (No. 2) Regulations 2023, have now been made and laid. Following consultation feedback changes have been made to the version of the draft regulations that was published for consultation. These changes are set out in the following sections.

Reporting of annual allowance (AA) tax charge for 2022 to 2023

Individuals should not report their 2022 to 2023 AA position through self assessment (where the deadline is 31 January 2024) if they:

• were still building rights in a Chapter 1 scheme
• have rights under a public service scheme that is impacted by the remedy
• will have an AA charge for the 2022 to 2023 tax year

They should not report their 2022 to 2023 AA position through self-assessment (where the deadline is 31 January 2024). They will be subject to a new separate reporting framework.

This will extend to cover all 2022 to 2023 AA tax charges relating to those impacted by the public service pensions remedy within this new separate reporting framework, even where there is no change to the amount of their AA charge due to the remedy. This is because individuals impacted by the remedy may not be able to work out whether their AA position would be affected before 31 January 2024 self assessment deadline.

Reporting requirements

The new process for individuals to report an AA tax charge for the 2022 to 2023 tax year will be available in an electronic form and further guidance on the form will be published in due course. Generally, the deadline for reporting these charges will be 31 January 2025 for those who are still building up pension rights (active members) or are no longer building up rights but have not yet taken a pension (deferred members). For all others with an AA tax charge who are impacted by the remedy, the deadline for reporting will be 31 January 2027.

Example

Arthur is impacted by the public service pensions remedy, and is an active member of a public service scheme at 1 October 2023. Arthur thinks he may have an AA charge for the 2022 to 2023 tax year but as he is impacted by the remedy, he does not include details of his AA charge on his self assessment return for 2022 to 2023. Arthur receives his pension savings statement for the 2022 to 2023 tax year in July 2024. Using an AA calculator, Arthur works out that he is liable to an AA charge of £2,500 in the tax year 2022 to 2023. Arthur asks for the public service scheme to pay the charge. Arthur must submit information to HMRC by 31 January 2025 using the new process. When sending the required information to HMRC, Arthur must provide details of the scheme who will pay the charge on his behalf.

Scheme pays extended to fully retired members

Following stakeholder feedback, members who have fully crystallised their public service pension scheme benefits will be able to make a mandatory scheme pays election where their AA charge increases as a result of the public service pensions remedy.

Due to how the remedy works, the relevant public service pension scheme administrators will already be required to adjust the amount of the member’s benefit entitlement so this change should not impose any further administrative burden.

Scheme administrator applications for repayment of overpaid tax

Public service pension scheme administrators will have an extended deadline to apply for a repayment of overpaid annual allowance or lifetime allowance tax charges that arises due to the public service pensions remedy. A similar deadline will be available for scheme administrators to apply for repayment of scheme sanction charges that are no longer due because of the remedy. This puts scheme administrators in a similar position to members when applying for repayment of tax arising from the remedy.

Lifetime allowance excess lump sum that is no longer a lifetime allowance excess lump sum due to the remedy

Where the member’s choice under the remedy reduces the amount of lifetime allowance (LTA) used up, the result could be that all or part of a lump sum that was an LTA excess lump sum is no longer an LTA excess lump sum.

Following consultation feedback on the operational issues caused by the different treatment of LTA charges and the taxation on pension income under PAYE, there has been a change to how the lump sum will be taxed.

Part or all of the lump sum is to be set against available LTA and instead of being taxed in the same way as if it had been taken as a pension commencement lump sum (PCLS) and pension, it will be calculated as subject to the LTA charge at a special lower rate of 40%. This will enable scheme administrators to calculate the amount of tax due, reclaim the overpaid LTA charge and ensure the member receives, broadly, the correct amount of benefit in their hands.

Example

In the 2020 to 2021 tax year Paula crystallises benefits under a Chapter 1 scheme using up 80% of the LTA as follows:

• Scheme pension (Benefit Crystallisation Event (BCE) 2) = 69% LTA
• PCLS (BCE 6) = 11% LTA

In the 2021 to 2022 tax year Paula crystallises the following benefits under a non-public service scheme:

• Drawdown pension designation (BCE 1) = 15% LTA
• PCLS (BCE 6) = 5% LTA
• LTAELS (BCE 6) = £321,930 (equivalent to 30% LTA)
• £177,061.50 LTA charge (at 55%) was paid in respect of the LTA excess lump sum and Paula was paid the remaining £144,868,50

Under the public service pension remedy, Paula’s immediate choice results in the BCE that occurred in the 2020 to 2021 tax year being recalculated. The amount of LTA used up by Paula has reduced from 80% to 64%. When Paula crystallised rights under the non-public service scheme she had 36% available LTA, not 20%, so she has an extra 16% available LTA. As a result, the lump sum of an amount equivalent to 30% of the LTA, cannot be an LTA excess lump sum, as that requires no LTA to be available.

The amount of the lump sum where there was available LTA will now be an authorised payment (in the example this is 16% of the LTA — £171,696) and treated as a BCE which occurs when Paula became entitled to the lump sum — in this example in the 2021 to 2022 tax year. The amount crystallised is the amount of the new authorised payment.

The remainder of what was an LTA excess lump sum (14% LTA, £150,234) remains an LTA excess lump sum.

As a result, the BCEs under the non-public service scheme occur as:

• PCLS (BCE 6) = 5% LTA
• Drawdown pension designation (BCE 1) = 15% LTA
• Lump sum authorised (and a BCE) = 16% LTA (£171,696)
• LTA excess lump sum (BCE 6) = 14% LTA (£150,234)

For the tax treatment of the £171,696 lump sum:

• 25% of the lump sum (£42,924) is payable tax free
• 75% of the lump sum (£128,772) is subject to the LTA charge at the special lower rate of 40%. The amount of LTA charge due is £51,508.80

The amount of LTA charge originally paid was £177,061.50.

The amount of LTA charge now due is £134,137.50, calculated as:

• LTA charge on authorised lump sum — £171,696 at40% = £51,508.80
• LTA charge on revised LTA excess lump sum — £150,234 at 55% = £82,628.70
• The amount of overpaid LTA charge is £42,924

The scheme administrator of the non-public service scheme may claim back this overpaid LTA charge from HMRC and can pass this payment on to the member.

Benefits from member voluntary contributions (MVCs) in payment before the remedy comes into force

Where, before the remedy, a member has benefits in payment in respect of member voluntary contribution rights in a Chapter 1 scheme, when changes are made by virtue of section 20 PSPJOA to apply the remedy, any additional lump sum paid in connection with these voluntary contributions rights, will be treated as an unauthorised payment.

Where public service pension schemes have made scheme regulations in line with advice to modify the operation of PSPJOA so that voluntary contribution rights can be treated in the same way as basic pensionable service subject to the public service pensions remedy, the tax changes to limit the pension commencement lump sum (PCLS) payable will not operate. This is because where scheme regulations correctly modify how PSPJOA applies in respect of voluntary contributions rights, an excessive PCLS will not be possible.

Changes consequential to Finance (No. 2) Act 2023

Sections 18 and 19 of Finance (No. 2) Act 2023 remove the LTA charge and make certain lump sums (including serious ill-health lump sums) in excess of the LTA taxable as pension income. Where a top-up to a serious ill-health lump sum is paid due to the public service pensions remedy after the member’s death and is in excess of the member’s LTA, the excess is taxable as pension income. This gives the payment the same tax treatment as a serious ill-health lump sum paid after 5 April 2023.