PTM135200 - Unauthorised payments: the scheme sanction charge: scheme chargeable payments and exceptions
Glossary PTM000001
What are scheme chargeable payments
Pension schemes in existence before 6 April 2006 - lump sums exceeding maximum pension commencement lump sum
Rights accrued or contributions paid before 6 April 2006
What are scheme chargeable payments
Section 241 Finance Act 2004
Scheme chargeable payments are in general any (member or employer) unauthorised payments made by the pension scheme which are not specifically listed as exceptions. See below for the exceptions.
Other scheme chargeable payments are:
- a payment that the pension scheme is treated as having made and classed as a scheme chargeable payment by section 183 or 185 Finance Act 2004 because of unauthorised borrowing
- a payment that the scheme is treated as having made and classed as a scheme chargeable payment by section 185A Finance Act 2004 (income from taxable property) or section 185F Finance Act 2004 (gains from taxable property)
- before 6 April 2011, a payment that the scheme is treated as having made and classed as a scheme chargeable payment by section 181A Finance Act 2004 due to the failure to make the minimum level of payment either to a member from an alternatively secured pension fund or to a dependant from a dependant’s alternatively secured pension fund.
Exceptions - unauthorised payments that are not scheme chargeable payments
Section 241(2) Finance Act 2004
These are:
- the payment is treated as having been made by section 173 Finance Act 2004 and the asset used to provide the benefit is not a wasting asset (as defined in section 44 Taxation of Chargeable Gains Act 1992). Section 173 treats the use of a scheme asset to provide a benefit to a member or a member of their family or household as an unauthorised payment
- the payment is a compensation payment to a sponsoring employer as defined by section 178 Finance Act 2004. (The payment is made to a sponsoring employer in respect of a liability to that employer that arises from a criminal, fraudulent or negligent act or omission by the member)
- the payment is made to comply with a court order or an order by a person or body with the power to order the making of the payment
- the payment is made on the grounds that a court or any such person or body is likely to order (or would be were it asked to do so) the making of the payment. (The possibility of a court/such person ordering the payment should be the only, or significant, reason for making the payment
- a payment made merely in accordance with pension scheme rules on the premise that had the payment been refused a court/such person is likely to order the making of the payment is unlikely to fall within this exemption on the basis that the only reason for making payment was to meet a contractual obligation)
- the payment is of a description prescribed by regulations made by HMRC - see further explanations below.
Timely repayment of money withheld to pay scheme sanction charge
Where an unauthorised payment has been made but has been reduced because an amount is withheld in anticipation of a scheme sanction charge and 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.
Pension schemes in existence before 6 April 2006 - lump sums exceeding maximum pension commencement lump sum
Paragraph 30 schedule 36 Finance Act 2004
There is no scheme sanction charge on any unauthorised lump sum payment that is not a pension commencement lump sum solely because it is more than the permitted maximum (as defined by paragraph 2 schedule 29 of the Finance Act 2004) and the payment would not have been unauthorised if either:
- in the case of a member with enhanced protection paragraphs 27 and 29 schedule 36 Finance Act 2004 had not applied
- in the case of a member without enhanced protection paragraph 28 schedule 36 Finance Act had not applied.
Rights accrued or contributions paid before 6 April 2006
Section 241(2) Finance Act 2004
The Registered Pension Schemes (Unauthorised Payments by Existing Schemes) Regulations 2006 - SI 2006/365
Paragraph 3 schedule 36 Finance Act 2004
The Registered Pension Schemes (Modification of Rules of Existing Schemes) Regulations - SI 2006/364
An unauthorised payment is exempted, in whole or in part, from being a scheme chargeable payment if:
- the pension scheme was in existence before 6 April 2006 and automatically became a registered pension scheme from that date, and
- the unauthorised payment is made in accordance with a current provision that was in place in the rules of the scheme immediately before 6 April 2006, and
- the unauthorised payment is referable to subsisting rights which have accrued under defined benefits arrangements before 6 April 2006, or to contributions which have been paid to a scheme under money purchase arrangements before 6 April 2006.
Where such an unauthorised payment is made and it comprises a mixture of subsisting rights or contributions before 6 April 2006 (as described above) and other accrued defined benefit rights or contributions which have been paid to a scheme under money purchase arrangements on or after 6 April 2006, the balance of the payment relating to those other rights or post-5 April 2006 money purchase contributions will be a scheme chargeable payment.
The exemption is limited in the case of a payment which is a refund of additional voluntary contributions.
Refunds of additional voluntary contributions
If all of a refund of additional voluntary contributions to a member related to subsisting rights under a defined benefits arrangement or pre-6 April 2006 contributions to a money purchase arrangement, all of the payment would, ordinarily, be exempt from the scheme sanction charge. If some or all of that refund could have been used to provide benefits to the member and the member’s dependants that would not have prejudiced the tax approval of the scheme immediately before 6 April 2006, that part of the refund is not exempted from being a scheme chargeable payment and the scheme sanction charge will apply in respect of it.
Similarly, if part of a refund of additional voluntary contributions is ordinarily exempted from the scheme sanction charge because it relates to subsisting rights under a defined benefits arrangement or pre-6 April 2006 contributions to a money purchase arrangement, that part of the payment is further reduced by the amount that could have been used to provide additional benefits that would not have prejudiced approval before 6 April 2006.
Example
A registered pension scheme makes an unauthorised member payment of £15,000 that comprises a refund of additional voluntary contributions, of which £10,000 relates to money purchase contributions made before 6 April 2006 and the balance (£5,000) to contributions made on or after 6 April 2006.
Out of the portion relating to pre-6 April 2006 contributions, £7,000 could have been used to provide benefits in respect of the member that would not have prejudiced the tax approval of the scheme before 6 April 2006. The amount of that part of the unauthorised member payment which is exempted from being a scheme chargeable payment is £3,000 (£10,000 - £7,000).
The scheme sanction charge applies to all of the part of the refund - £5,000 - that relates to the contributions made on or after 6 April 2006 as all of that part of the payment is not exempted from being a scheme chargeable payment.
Overall, the amount of the unauthorised member payment that is a scheme chargeable payment scheme is £12,000 (£7,000 worth of the part of the payment relating to pre-6 April 2006 contributions plus all £5,000 worth of the part of the payment relating to the post-5 April 2006 contributions). The scheme sanction charge is based on the amount of £12,000.
Payments before 6 April 2011
Where the payment was made before 6 April 2011, ‘transitional period’ rules applied. See National Archives version of page RPSM04104835.