Guidance

Appendix B — offsetting process for the unauthorised payments charge

Updated 26 September 2024

This guidance provides the process for the new offsetting procedure for unauthorised payments charges where additional payments of benefits (for example, top-up lump sums) are made as a result of the retrospective public service pensions remedy.

There are 2 worked examples of calculating the amount of the unauthorised payments charge due under the offsetting process at the end of this guidance.

For a scheme administrator to be able to use this process all the following conditions must apply:

• part of the original lump sum was an unauthorised payment, and as a result of the public service pension remedy the amount of that lump sum that was an unauthorised payment has changed

• part or all of the top-up lump sum is an unauthorised payment

• the mandating procedure was used to deduct the unauthorised payments charge from the original lump sum payment

• the scheme administrator actually paid the unauthorised payments charge to HMRC —  you will need to be able to tell HMRC when you paid the tax charge in respect of the member — if you cannot do this you will not be able to use the offsetting process

For the avoidance of doubt, as the offsetting process is adjusting the amount of tax due in respect of a current unauthorised payment, it can be used to offset the tax due on lump sums paid before 6 April 2019. 

Under the process:

• the scheme administrator will be jointly and severally liable with the member to the unauthorised payments charge

• there will be a separate reporting process for the unauthorised payment in place of the normal report that should be made under the event report

• the amount of the unauthorised payments charge due on the top-up lump sum (and interest) that is an unauthorised payment will be reduced to take account of tax that was overpaid in respect of the original lump sum payment

Offsetting process — actions for scheme administrators

Where the member has top-up benefits

To offset an unauthorised payments charge, you need to complete the following steps.

1. Calculate the amount of any pension commencement lump sum (PCLS) paid to the member by the new (reformed) pension scheme that relates to service before 1 April 2022.

2. Calculate the amount of the lump sum due from the legacy pension scheme using the member’s choice of benefits for the remedy period.

3. Calculate the amount of that lump sum that is a pension commencement lump sum (PCLS).

4. Revise the amount of the original lump sum or sums paid to the member that is a PCLS and the amount that is an unauthorised payment.

5. Calculate the unauthorised payments charge on the revised unauthorised payment or payments.

6. Calculate the amount of the unauthorised payments charge that has been overpaid.

7. Calculate the amount of the top-up lump sum, by adding the amount of the original lump sum paid from the legacy scheme and the amount of the lump sum paid from the new scheme that relates to pre April 2022 service. Deduct that total from the amount of the lump sum due from the legacy scheme using the member’s choice of benefits for the remedy period.

8. Calculate the amount and the proportion of the top-up lump sum that is an unauthorised payment.

9. Calculate the interest on the top-up lump sum in line with direction 14(5) of The Public Service Pensions (Exercise of Powers, Compensation and Information) Directions 2022 or The Public Service Pensions (Exercise of Powers, Compensation and Information) Directions (Northern Ireland) 2023.

10. Calculate the amount of that interest payment that is an unauthorised payment.

11. Calculate unauthorised payments charge on the top-up lump sum and on interest before any offsetting.

12. Calculate repayment interest on the overpaid unauthorised payments charge.

13. Calculate the net unauthorised payments charge on the top-up lump sum and interest. Deduct the total of the overpaid unauthorised payments charge and repayment interest from the amount of the unauthorised payment charge due on the top-up lump sum and interest.

To offset the scheme sanction charge, you need to complete the following steps.

1. Calculate the amount of the overpaid scheme sanction charge, which is 15% of the difference between the original unauthorised payment and the revised unauthorised payment.

2. Identify the amount of the top-up payment that is an unauthorised payment and is also subject to the scheme sanction charge.

3. Calculate the scheme sanction charge on the top-up lump sum that is subject to the scheme sanction charge.

4. Calculate the repayment interest on the overpaid scheme sanction charge. Calculate the net scheme sanction charge. Deduct the total of the overpaid scheme sanction charge and repayment interest from the amount of the scheme sanction charge due on the top-up lump sum.

Recalculating the amount of the original lump sum that was an unauthorised payment

When paying the top-up lump sum, the first thing you need to do is work out the revised amount of the maximum PCLS that was payable from the legacy pension scheme.

With that information you then need to complete the following steps.

1. Recalculate the amount of the original lump sum that was an unauthorised payment.

2. Recalculate the revised unauthorised payments charge due and the amount overpaid

3. Calculate the amount of the top-up lump sum that is an unauthorised payment.

4. Calculate the amount of interest payment in respect of the top-up lump sum that is an unauthorised payment.

When you have these amounts you will be able to calculate the amount of the unauthorised payments charge due under the offsetting process.

The figures you need to do this calculation depend on which schemes the member received benefits from. If the member took benefits from both the legacy and the new (reformed) scheme, you need to identify how much of the new scheme benefits relates to pre-April 2022 service and how much relates to service from 1 April 2022.

You need to carry out this split of new scheme benefits to calculate the correct amount of any top-up lump sum, or benefit overpayment, and to identify the correct tax treatment of the benefits. 

Section 3 of the Public Service Pensions and Judicial Offices Act 2022 (PSPJOA) provides that benefits paid from the new scheme that relate to service during the remedy period are treated for all purposes as paid from the legacy scheme. This means that any lump sum paid from the new scheme that relates to remediable service must be included in the recalculation of original payment or payments that was an unauthorised payment.

The recalculation

You will need the following 3 figures to work out the revised amount of the unauthorised payment:

(a) the amount of the lump sum originally payable from the legacy scheme (before any deduction made under the mandating procedure for the unauthorised payments charge)

(b) the amount of any lump sum paid from the new scheme that relates to remediable service

(c) the revised maximum PCLS that will arise when you pay the top-up lump sum

Add figures (a) and (b) together to find the total amount of the lump sums paid or treated as paid from the legacy scheme.

From this total amount deduct (c) — the revised amount of the maximum PCLS.

The result is the revised amount of the original lump sum that was an unauthorised payment. 

If the result is a negative amount this means that the original lump sum paid was not an unauthorised payment and there is still an amount to be allocated against a later lump sum payment from the legacy scheme.

As the unauthorised payment cannot arise until the maximum PCLS has been used up, it is allocated on a chronological basis. Where more than one lump sum payment is made, allocate the PCLS amount to the first payment, any remaining balance will be allocated to the next earliest payment.

Recalculating the amount of the original unauthorised payment charge and amount overpaid

Having established the revised amount of the unauthorised payment, you will then need to work out the amount of tax actually due. This is 40% of the revised amount of the unauthorised payment.

The amount of the overpaid unauthorised payments charge is the amount that was actually paid to HMRC, less the revised amount of unauthorised payments charge due.

Calculating the amount of the top-up lump sum and interest that is an unauthorised payment

If part of the original lump sum payments made, or treated as made from the legacy scheme is still an unauthorised payment then all of the:

• top-up lump sum is an unauthorised payment

• interest paid in respect of that top-up lump sum is an unauthorised payment

If none of the lump sum paid, or treated as paid, from the legacy scheme is an unauthorised payment, you need to work out how much of the top-up lump sum is unauthorised.

Find the total value of the lump sum paid, or treated as paid, by the legacy scheme by adding together the amounts of:

• the lump sum originally payable from the legacy scheme (before any deduction made under the mandating procedure for the unauthorised payments charge)

• any lump sum paid from the new scheme that relates to remediable service, as this is treated as paid by the legacy scheme

• the top-up lump sum

From this total amount deduct the amount of the revised maximum PCLS that arises when you pay the top-up lump sum.

The result is the amount of the top-up lump sum that is an unauthorised payment.

If the result is zero or a negative amount this means that the top-up lump sum, together with any interest due in respect of that payment, is not an unauthorised payment. 

Where part, but not all, of the top-up lump sum is an unauthorised payment, you need to work out how much of the interest will be an unauthorised payment. This is done on a proportional basis. You will need to find out what percentage of the top-up lump sum is an unauthorised payment and apply that percentage to the interest. For example, if 90% of the top-up lump sum is unauthorised, 90% of the interest payment will be an unauthorised payment.

Calculating the amount of the unauthorised payments charge

The total of the amounts of the top-up lump sum that is an unauthorised payment and the interest that is an unauthorised payment is the total amount of the unauthorised payment.

Now that you have identified the amount of the unauthorised payment you now need to calculate the amount of the unauthorised payments charge.

The broad formula for this is 40% of the unauthorised payment — the amount of the overpaid charge, plus repayment interest.

To carry out the calculation you need the following information:

• the amount of the unauthorised payment being made now

• the amount of the overpaid unauthorised payments charge

• the date that you paid the unauthorised payments charge to HMRC

• the date of payment of the current unauthorised payment

The dates are used to recalculate the repayment interest.

The repayment interest element is calculated using the interest rate that applies to repayment of overpaid tax. You can find details of the relevant interest rates and the periods they applied to.

Repayment interest is due for the period:

• starting with the later of the tax payment due date (31 January following the end of the relevant tax year) and the date on which the tax was paid

• ending with the date on which the top-up lump sum is paid to the member

You will need to:

• add repayment interest to the overpaid unauthorised payments charge in relation to the original lump sum — you will calculate this from the later of 31 January following the end of the relevant tax year and the date you actually paid the unauthorised payments charge to HMRC

• deduct that total from the unauthorised payments charge on the top-up lump sum and related interest

The amount remaining will be the amount of unauthorised payments charge you are jointly liable to pay. You will deduct the charge from the lump sum before paying it to the member.

An example of calculating the amount of the unauthorised payments charge

Jeremy is impacted by the public service pensions remedy. When he started to take his pension rights in June 2021 he commuted some of his pension to receive a lump sum which was in excess of the tax-free limits. Jeremy provided his pension scheme with a mandate to pay the unauthorised payments charge on his behalf and received his lump sum. The pension scheme paid the tax to HMRC on 12 September 2021.

Jeremy was rolled back into his legacy pension scheme on 1 October 2023 and received his remediable service statement in 2024. Jeremy made a choice for legacy benefits and as a result:

• has overpaid a £1,600 unauthorised payments charge on his original benefits, in respect of the 2021 to 2022 tax year

• is due an additional payment of £4,800 top-up lump sum and £1,200 interest — this £6,000 is an unauthorised payment, which is to be paid 30 September 2024

Repayment interest is due on the £1,600 overpayment running from the later of the tax due date (31 January 2023) and the date the tax was paid to HMRC (12 September 2021). The start date for calculating repayment interest is 31 January 2023.

The end date for calculating repayment interest is 30 September 2024 (the date the top-up lump sum is paid).

Jeremy’s scheme administrator applies the published repayment interest rates and calculates the amount of repayment interest as £104.50, based on:

• 21 days at 2.5%

• 51 days at 3%

• 48 days at 3.25%

• 41 days at 3.5%

• 42 days at 4%

• 364 days at 4.25%

• 41 days at 4% (assumes no change in rate from 20 August 2024)

The amount of the charge on the top-up payment without offsetting is £2,400 (40% of £6,000).

The overpayment and repayment interest totals £1704.50, which is set against the new charge of £2,400.

Jeremy’s scheme administrator calculates the amount of the unauthorised payments charge using the following calculation.

£2,400 – (£1,600 + £104.50) = £695.50.

The scheme administrator deducts the £695.50 unauthorised payments charge from the £6,000 unauthorised payment and pays £5,304.50 to the member.

Offsetting process for scheme sanction charges

You can only use the offsetting process for the scheme sanction charge if you have used the offsetting process for the unauthorised payments charge.

Under this process the amount of the scheme sanction charge is set at 15% and then reduced to take account of the scheme sanction charge tax that was overpaid in respect of the original lump sum payment.

Having recalculated the amount of the original lump sum that was an unauthorised payment you need to calculate the amount of the overpaid scheme sanction charge.

Pension rights that existed before 6 April 2006 are generally not subject to the scheme sanction charge. If a member had accrued benefit under the scheme before 6 April 2006, not all the original unauthorised payment would have been subject to the scheme sanction charge. However, as the adjustment to the benefit relates to service after 31 March 2015 all those benefits would have been subject to the scheme sanction charge.

The amount of the overpaid scheme sanction charge is therefore 15% of the difference between the original amount of unauthorised payment and the revised amount of the unauthorised payment.

Exempt scheme sanction charge on interest on unauthorised payments

You will need to pay a scheme sanction charge when you pay a top-up lump sum that is an unauthorised payment to a member.

Under the Treasury Directions, interest must be paid on that lump sum at a set rate. Interest on an unauthorised payment is also an unauthorised payment but you will not have to pay the scheme sanction charge on that interest.

While the interest paid in respect of a top-up lump sum that is an unauthorised payment will be an unauthorised payment, it will be exempt from the scheme sanction charge. The scheme sanction charge (before any adjustment for the overpaid scheme sanction charge), in relation to the top-up payments, will therefore be 15% of the amount of the top-up lump sum that is an unauthorised payment and will not apply to the interest on the top-up lump sum that is also an unauthorised payment.

Calculating the amount of the scheme sanction charge

Now that you have identified the amount of the top-up payments subject to the scheme sanction charge and the amount of the overpaid scheme sanction charge, you can calculate the amount of the scheme sanction charge due. 

The broad formula for this is 15% of the amount subject to the charge, minus (the amount of the overpaid charge, plus repayment interest).

To carry out the calculation you need the following information:

• the amount of the unauthorised payment being made now that is subject to the scheme sanction charge

• the amount of the overpaid scheme sanction charge

• the date that you paid the original scheme sanction charge to HMRC

• the date of payment of the current unauthorised payment

The dates are used to recalculate the repayment interest.

The repayment interest element is calculated using the interest rates that applies to repayment of overpaid tax. You can find details of the relevant interest rates and the periods they applied to.

Repayment interest is due for the period:

• starting with the later of the tax payment due date (31 January following the end of the relevant tax year) and the date on which the tax was paid

• ending with the date on which the top-up lump sum is paid

You will need to:

• add repayment interest to the overpaid scheme sanction charge in relation to the original lump sum — you will calculate this from the later of 31 January following the end of the relevant tax year and the date you actually paid the scheme sanction charge to HMRC

• deduct that total from the scheme sanction charge on the top-up lump sum

The amount remaining will be the amount of scheme sanction charge you are liable to pay.

An example of calculating the amount of the scheme sanction charge

Jeremy’s scheme administrator calculates the following amounts:

• overpayment of original scheme sanction charge of £600

• new scheme sanction charge of £720 (15% of the top-up lump sum, which is £4,800)

The original scheme sanction charge was paid to HMRC on 12 September 2021 and Jeremy was paid the top-up lump sum on 30 September 2024.

Repayment interest is due on the £600 overpayment running from the later of the tax due date (31 January 2023) and the date the tax was paid to HMRC (12 September2021). So, the start date for calculating repayment interest is 31 January 2023.

The end date for calculating repayment interest is 30 September 2024 (the date the top-up lump sum is paid).

Jeremy’s scheme administrator applies the published repayment interest rates and calculates the amount of repayment interest as £39.19, based on:

• 21 days at 2.5%

• 51 days at 3%

• 48 days at 3.25%

• 41 days at 3.5%

• 42 days at 4%

• 364 days at 4.25%

• 41 days at 4% (assumes no change in rate from 20 August 2024)

Jeremy’s scheme administrator calculates the amount of the scheme sanction charge as follows.

£720 – (£600 + £39.19) = £80.81.

Removal of refund of offset scheme sanction charge

Where you have offset the overpaid scheme sanction charge against the new scheme sanction charge you will not be able to claim a refund of the overpaid amount. However, where the amount of the overpaid scheme sanction charge is more than the scheme sanction charge due on the top-up lump sum, you will be able to reclaim from HMRC the balance after offsetting.

Reporting and assessing offset unauthorised payments charges and scheme sanction charges

After you have paid the top-up lump sum to the member you will need to use the new separate reporting requirement to report all of the following:

• the new unauthorised payment

• the new offset unauthorised payments charge

• details of the original payment and charge 

You need to make this report, even if the amount of the overpaid unauthorised payments charge from the original lump sum payment has reduced the amount of tax due on the top-up lump sum and interest to £0.

You will not be required to amend the event report that you used to report the original lump sum. Do not report the top-up unauthorised payment on the event report.

HMRC will confirm the final detail of the reporting requirements in due course. However, the report will include details relating to the:

• scheme and member

• original unauthorised payment, including when the tax was paid to HMRC, and the revised amount of the payment

• top-up lump sum (and interest) that is an unauthorised payment

• calculation of the amount of the unauthorised payments charge and scheme sanction scheme due in respect of the top-up lump sum and interest

After receipt of the report, where tax is due HMRC will issue you with an assessment for the unauthorised payments charge and for the scheme sanction charge.

Benefits taken from new and legacy scheme in tax year 2023 to 2024 — worked example 1

A case study of original benefits paid

Paul was a police officer who retired in September 2023. When he retired he received the following benefits. Although Paul became entitled to benefits under both the legacy scheme and the new scheme on the same date (15 September 2023), his lump sums were paid on different dates as follows.

Legacy scheme

Paul took the following benefits under the legacy scheme on 15 September 2023:

• pension taken is £20,000

• lump sum paid is £148,000

The maximum PCLS from the scheme was £137,000, so £11,000 (£148,000 – £137,000) was an unauthorised payment.

An unauthorised payments charge of £4,400 (40% of £11,000) was due. This was deducted from Paul’s lump sum under the mandating procedure. It was paid to HMRC on 5 January 2025.

The scheme administrator paid a scheme sanction charge of £1,200 on 14 February 2025.

New scheme

Paul took the following benefits under the new scheme on 22 September 2023:

• pension taken is £500

• lump sum paid is £3,300

This amount needs to be split between both the:

• pre April 2022 service (which is rolled back to the legacy scheme)
• service from 1 April 2022 (which remains in the new scheme)

The split of Paul’s benefits paid from the new scheme is as follows.

Benefit	Pre 1 April 2022 service	Post 31 March 2022 service	Total
Pension	£300	£200	£500
Lump sum	£2,000	£1,300	£3,300

You need to carry out this split of benefits to calculate the correct amount of any top-up lump sum, or benefit overpayment, and to identify the correct tax treatment of the benefits.

Immediate choice benefits

As Paul retired before 1 October 2023 he is offered an immediate choice between legacy benefits and new scheme benefits in respect of his service during the remedy period (1 April 2015 to 31 March 2022).

In December 2024 Paul is sent a remediable service statement (RSS) outlining his benefit options. Paul chooses to have legacy benefits in respect of the remedy period. 

As a result of Paul’s choice, his revised benefits are as follows.

Legacy scheme

Pension = £21,000

Lump sum = £155,000

New scheme

Pension = £200

Lump sum = £1,300

Calculating the amount of the top-up lump sum from the legacy scheme

Paul should get a lump sum of £155,000 from the legacy scheme.

Section 3(2) PSPJOA provides that benefits paid from the new scheme that relate to Paul’s remediable service are treated for all purposes as paid by the legacy scheme. Of the lump sum Paul received on 22 September 2023 from the new scheme, £2,000 relates to service during the remedy period. This amount is treated as paid from the legacy scheme and not the new scheme.

This means that so far the legacy scheme has paid Paul total lump sums of £150,000. This made up of £148,000, paid 15 September 2023 and £2,000, paid 22 September 2023.

Section 14(6) PSPJOA provides that the scheme manager must pay a top-up lump sum of an amount equal to the difference to the amount Paul is entitled to (£155,000) and the amount Paul received (or is treated as receiving) from the legacy scheme (£150,000).

So the scheme manager needs to pay a top-up lump sum of £5,000.

The scheme manager pays the top-up lump sum on 31 March 2025.

Recalculating the maximum PCLS for the legacy scheme

When the scheme manager pays the extra lump sum this triggers the recalculation of the maximum PCLS. As entitlement to the benefits arose in the 2023 to 2024 tax year this is calculated using the rules in place before 6 April 2024.

Guidance on the pre-6 April 2024 rules for calculating the maximum PCLS can be found on the National Archive website, in the archived version  of the Pensions Tax Manual at:

• PTM063230

• PTM063240

• PTM063250

These are the only pension benefits that Paul has and are less than Paul’s lifetime allowance. This means that the maximum PCLS payable from the legacy scheme is the ‘applicable amount’. This is set by the formula (lump sum + amount crystallised) ÷ 4.

The lump sum is £155,000.

The lump sum is the total lump sums paid from the legacy scheme.

Amount crystallised is £420,000, the amount crystallised as scheme pension from the legacy pension scheme (20 × £21,000 = £420,000).

This means that the maximum PCLS is £143,750 ((£155,000 + £420,000) ÷ 4 = £143,750).

Recalculating the amount of the original unauthorised payments

The actions of PSPJOA mean that the legacy scheme is treated as paying the following 2 lump sums:

• £148,000, paid on 15 September 2023

• £2,000, paid 22 September 2023

Originally the amount of the unauthorised payment was £11,000. This is the difference between the amount of the £148,000 lump sum actually paid from the legacy scheme and the original maximum PCLS of £137,000.

As the unauthorised payment cannot arise until the maximum PCLS has been used up, it is allocated on a chronological basis. So it is first allocated to the earliest payment, any remaining balance will be allocated to the next earliest payment, and so on.

In this example the revised maximum PCLS of £143,750 is still less than the previous £148,000 lump sum paid from the legacy scheme. 

As a result of the retrospective remedy the unauthorised payments made by the legacy scheme are:

• £4,250 paid 15 September 2023 (£148,000 - £143,750 = £4,250)

• £2,000 paid 22 September 2023

Total unauthorised payments made to Paul from the legacy scheme in 2023 to 2024 are £6,250.

Calculating the amount of the overpaid unauthorised payments charge

Originally the amount of the unauthorised payment for 2023 to 2024 was £11,000. A £4,400 unauthorised payments charge was paid to HMRC on 5 January 2025.

The revised unauthorised payment for 2023 to 2024 is £6,250. 

The unauthorised payments charge due on that amount is £2,500 (40% of £6,250)

Paul’s revised unauthorised payments charge for 2023 to 2024 is £2,500. 

£1,900 has been overpaid (£4,400 actually paid, less £2,500 actually due).

Calculating the amount of the overpaid scheme sanction charge

Originally the amount of the unauthorised payment for 2023 to 2024 was £11,000. 

A scheme sanction charge of £1,200 was paid. This is less than 15% of the whole of the unauthorised payments, as the part of the payment built up before 6 April 2006 is not subject to the scheme sanction charge.

As the recalculation of the unauthorised payment relates to service during the remedy period, it follows that the whole of the benefit for that period would have been subject to the scheme sanction charge.

The amount of the overpaid scheme sanction charge is therefore 15% of the difference between the original amount of unauthorised payment and the revised amount of the unauthorised payment.

£11,000 – £6,250 = £4,750.

£4,750 × 0.15 = £712.50.

The scheme administrator has overpaid £712.50 scheme sanction charge.

An example of calculating the amount of the top-up lump sum that is an unauthorised payment

In this example Paul has already used up his maximum PCLS. This means that the whole of the £5,000 top-up lump sum is an unauthorised payment.

Calculating the amount of interest that is an unauthorised payment

Scheme managers are required to pay interest on the top-up lump sum.

Paul’s legacy scheme pays £616 interest in respect of the top-up lump sum. 

As the whole top-up lump sum is an unauthorised payment, all of this interest payment is also an unauthorised payment.

If only part of the top-up lump sum was unauthorised, then the interest payment would be treated accordingly. For example, if 90% of the top-up lump sum is unauthorised, 90% of the interest payment will be unauthorised.

Calculating the amount of the unauthorised payments charge

Paul has received new unauthorised payments of £5,616 (£5,000 top-up lump sum plus £616 interest) on 31 March 2025. A new unauthorised payment charge arises in the in the 2024 to 2025 tax year. The amount of the tax due in respect of the new unauthorised payment is adjusted to reflect the amount of overpaid unauthorised payment charge due in respect of the original lump sum payments, made in September 2023.

The amount of tax due on this amount will be calculated as 40% of £5,616 minus (the amount of overpaid tax (£1,900), plus an amount reflecting repayment interest).

Repayment interest is due in respect of the overpaid tax on the original unauthorised payments for the period:

• starting with the later of the tax payment due date (31 January 2025) and the date on which the tax was paid to HMRC (in this example 5 January 2025).

• ending with the date on which the top-up lump sum is paid to the member (31 March 2025)

The interest calculation period, therefore, runs from 31 January 2025 and ends on 31 March 2025. The interest calculation period is 59 days.

Assume for the purpose of this example the interest rate is 4.25%.

The amount representing repayment interest is worked out as follows.

£1,900 × 59 ÷ 365 × 0.0425 (or 4.25%).

This is £13.05.

The amount of the new unauthorised payments charge is £333.35 and worked out as follows.

£5,616 × 0.4 (or 40%) = £2,246.40

£2,246.40 – (£1,900 + £13.05) = £333.35

After deduction of the new unauthorised payments charge, the member will receive £5,616 – £333.35 = £5,282.65.

An example of calculating the amount of the scheme sanction charge

Although Paul has received an unauthorised payment of £5,616, the amount of £616 interest included in the payment is exempt from the scheme sanction charge.

As the whole £5,000 top-up lump sum must relate to post 6 April 2006 service, all of it is subject to the scheme sanction charge in 2024 to 2025 at a rate of 15%.

The amount of the scheme sanction charge due in respect of the new unauthorised payment is adjusted to reflect the amount of overpaid scheme sanction charge in respect of the original lump sum payments made in September 2023.

The amount of new scheme sanction charge will be calculated as £5,000 × 0.15, minus (the amount of overpaid scheme sanction charge, plus an amount reflecting repayment interest).

The amount of the overpaid scheme sanction charge was £712.50.

Repayment interest on the overpaid scheme sanction charge in respect of the original unauthorised payments is due for the period:

• starting with the later of the tax payment due date (31 January 2025) and the date on which the tax was paid (14 February 2025)

• ending with the date on which the top-up lump sum is paid to the member (31 March 2025)

The interest calculation period therefore runs from 14 February 2025 and ends on 31 March 2025. The interest calculation period is 45 days.

Assume for the purpose of this example the interest rate is 4.25%.

The amount representing repayment interest is £712.50 × 45 ÷ 365 × 0.0425.

This is £3.73.

So the amount of the scheme sanction charge is £33.77 and is worked out as followed.

£5,000 × 0.15 (15%) = £750

£712.50 + £3.73 (£716.23)

£750 - £712.50 = £33.77

Benefits taken from legacy scheme only 2018 to 2019 — worked example 2

Original benefits paid

Samira was a firefighter who retired 3 April 2019 having reached age 50, with 30 years’ service. Samira is a taper-protected member who moved to the new scheme at the end of September 2018. She has 29.5 years pensionable service under the legacy scheme and 6 months pensionable service under the new scheme. 

Samira took the following benefits under the legacy scheme on 3 April 2019 (the 2018 to 2019 tax year):

• pension = £25,075

• lump sum = £200,600 paid 3 April 2019

The maximum PCLS from the scheme was £175,525, so £25,075 (£200,600 minus £175,525) was an unauthorised payment.

An unauthorised payments charge of £10,030 (40% of £25,075) was due. This was deducted from Samira’s lump sum under the mandating procedure. It was paid to HMRC on 31 January 2020.

The scheme administrator paid a scheme sanction charge of £2,000 on 5 May 2020.

Her benefits under the new scheme remain uncrystallised.

Immediate choice benefits

As Samira retired before 1 October 2023, she is offered an immediate choice between legacy benefits and new scheme benefits in respect of her service during the remedy period (1 April 2015 to 2 April 2019).

In December 2024 Samira is sent an RSS outlining her benefit options. Samira chooses to have legacy benefits in respect of the remedy period. As a result of Samira’s choice, her revised benefit under the legacy scheme are as follows:

• pension = £25,500

• lump sum = £204,000

Samira has no entitlement to benefit under the new scheme as she left pensionable service before 1 April 2022 and had not paid any AVCs into the new scheme.

Calculating the amount of the top-up lump sum from the legacy scheme

As a result of her choice, Samira should get a lump sum of £204,000 from the legacy scheme.

She received a lump sum payment of £200,600 from the legacy scheme; and had no benefits in payment from the new scheme before her rollback and immediate choice.

Section 14(6) PSPJOA provides that the scheme manager must pay a top-up lump sum of an amount equal to the difference to the amount Samira is entitled to (£204,000) and the amount she received (or is treated as receiving) from the legacy scheme (£200,600).

The scheme administrator needs to pay a top-up lump sum of £3,400. The top-up lump sum is paid on 17 January 2025.

Recalculating the maximum PCLS for the legacy scheme

Paying the extra lump sum triggers the recalculation of the maximum PCLS. As entitlement to the benefits arose in the 2018 to 2019 tax year this is calculated using the rules in place for that tax year.

These are the only pension benefits that Samira has and are less than her lifetime allowance. This means that the maximum PCLS payable from the legacy scheme is the ‘applicable amount’. This is set by the formula (lump sum + amount crystallised) ÷ 4.

The lump sum paid from the legacy scheme is £204,000 (before any deduction for tax).

The amount crystallised is £510,000, the amount crystallised as scheme pension from the legacy pension scheme (20 × £25,500 = £510,000).

This means that the revised maximum PCLS is £178,500 ((£204,000 + £510,000) ÷ 4 = £178,500).

Recalculating the amount of the original unauthorised payment

Originally the amount of the unauthorised payment was £25,075. This is the difference between the amount of the lump sum (before any reduction for tax) originally paid from the legacy scheme (£200,600) and the original maximum PCLS of £175,525.

In this example the revised maximum PCLS is £178,500.

As a result of the retrospective remedy, the unauthorised payment made by the legacy scheme is now £22,100 (£200,600 – £178,500 = £22,100).

Calculating the amount of the overpaid unauthorised payments charge

Originally the amount of the unauthorised payment for 2018 to 2019 was £25,075. £10,030 unauthorised payments charge was paid to HMRC on 31 January 2020.

The revised unauthorised payment for tax year 2018 to 2019 is £22,100. 

Samira’s revised unauthorised payments charge for tax year 2018 to 2019 is £8,840 (40% of £22,100). 

£1,190 has been overpaid (£10,030 actually paid less £8,840 actually due).

Calculating the amount of the overpaid scheme sanction charge

Originally the amount of the unauthorised payment for tax year 2018 to 2019 was £25,075. 

A scheme sanction charge of £2,000 was paid in respect of the original unauthorised payment of £25,075. This is less than 15% of the amount of the unauthorised payment as the part of the payment built up before 6 April 2006 is not subject to the scheme sanction charge.

As the recalculation of the unauthorised payment relates to service during the remedy period it follows that the whole of the benefit for that period would have been subject to the scheme sanction charge.

The amount of the overpaid scheme sanction charge is therefore 15% of the difference between both the:

• original amount of unauthorised payment
• revised amount of the unauthorised payment

This is worked out as follows.

£25,075 – £22,100 = £2,975.

£2,975 × 0.15 = £446.25.

The scheme administrator has overpaid £446.25 scheme sanction charge.

Calculating the amount of interest that is an unauthorised payment

In this example, Samira has already used up her maximum PCLS.  This means that the whole of the £3,400 top-up lump sum is an unauthorised payment.

Scheme managers are required to pay interest on the top-up lump sum. Samira’s scheme pays £1,575 interest in respect of the top-up lump sum.

As the whole top-up lump sum is an unauthorised payment, all of this interest payment is also an unauthorised payment.

Calculating the amount of the new unauthorised payments charge

Samira has received new unauthorised payments of £4,975 (£3,400 top-up lump sum plus £1,575 interest) on 17 January 2025. A new unauthorised payment charge arises in the in the 2024 to 2025 tax year. The amount of the tax due in respect of the new unauthorised payment is adjusted to reflect the amount of overpaid unauthorised payment charge due in respect of the original lump sum payment made 3 April 2019.

The amount of the new unauthorised payments charge will be calculated as 40% of £4,975 minus (the amount of overpaid tax (£1,190), plus an amount reflecting repayment interest).

Repayment interest is due in respect of the overpaid unauthorised payments charge on the original unauthorised payment for the period:

• starting with the later of the tax payment due date (31 January 2020) and the date on which the tax was paid to HMRC (in this example 31 January 2020)

• ending with the date on which the top-up lump sum is paid to the member (17 January 2025)

The interest calculation period therefore runs from 31 January 2020 and ends on 17 January 2025. This is a period of 4 years and 350 days.

The rate of interest to be used is that given on repayment of overpaid tax. You can find details of the relevant interest rates in Rates and allowances: HMRC interest rates for late and early payments.

Applying the published repayment interest rates the amount of repayment interest on the overpaid unauthorised payments charge is £115.05 based on:

• 2 years 204 days at 0.5%

• 49 days at 0.75%

• 42 days at 1.25%

• 45 days at 2%

• 46 days at 2.5%

• 51 days at 3%

• 48 days at 3.25%

• 41 days at 3.5%

• 42 days at 4%

• 364 days at 4.25%

• 150 days at 4% (assumes no change in the interest rate from 20 August 2024)

The amount of the new unauthorised payments charge is £684.95 and worked out as follows.

£4,975 × 0.4 (or 40%) = £1,990

£1,990 – (£1,190 + £115.05) = £684.95.

Samira’ scheme administrator deducts the unauthorised payments charge due from the top-up payments and pays the balance of £4,290.05 to Samira on 17 January 2025.

Calculating the amount of the scheme sanction charge

Although Samira has received an unauthorised payment of £4,975, the amount of £1,575 interest included in that payment is not subject to the scheme sanction charge. 

As the top-up lump sum of £3,400 relates to service during the remedy period, that is post 6 April 2006 service, all of it is subject to the scheme sanction charge in 2024 to 2025, at a rate of 15%.

The amount of the scheme sanction charge due in respect of the new unauthorised payment is adjusted to reflect the amount of overpaid scheme sanction charge in respect of the original lump sum payment made 3 April 2019.

The amount of scheme sanction charge tax due on this amount will be calculated as 15% of £3,400 minus (the amount of overpaid scheme sanction charge (£446.25), plus an amount reflecting repayment interest).

Repayment interest is due for the period:

• starting with the later of the tax payment due date (31 January 2020) and the date on which the tax was paid to HMRC (in this example 5 May 2020)

• ending with the date on which the top-up lump sum is paid to the member (17 January 2025)

The interest calculation period therefore starts from 5 May 2020 and ends 17 January 2025. The interest calculation period is 4 years 257 days.

The rate of interest to be used is that given on repayment of overpaid tax. You can find details of the relevant interest rates in Rates and allowances: HMRC interest rates for late and early payments.

Applying the published repayment interest rates the amount of repayment interest on the overpaid unauthorised payments charge is £42.57 based on:

• 2 years 110 days at 0.5%

• 49 days at 0.75%

• 42 days at 1.25%

• 45 days at 2%

• 46 days at 2.5%

• 51 days at 3.0%

• 48 days at 3.25%

• 41 days at 3.5%

• 42 days at 4.0%

• 364 days at 4.25%

• 150 days at 4% (assumes no change in the interest rate from 20 August 2024)

So the amount of the new scheme sanction charge is £21.18 and is worked out as follows.

£3,400 × 0.15 (or 15%) = £510.

£510 – (£446.25 + £42.57) = £21.18.