Regrets, refunds and the relevance of contribution paid dates

  • Describe how the refund of excess contributions lump sum works and what is considered a genuine error.
  • Identify the date contributions are paid for tax purposes and how different payment methods are treated.
  • List what advisers need to know about pension savings statements.
Regrets, refunds and the relevance of contribution paid dates

At this time of year, pension providers’ mailboxes frequently groan under the weight of requests to refund contributions which have been paid “in error”.

These requests are usually the result of contributions which have been paid by, or for, the individual in good faith that have unwittingly caused an annual allowance excess, the loss of lifetime allowance protection or failed to attract tax relief in the desired tax year.

Advisers will be well aware that HM Revenue & Customs only allows contributions paid “in error” to be refunded in specific circumstances. Otherwise the refund becomes an unauthorised payment with all the tax consequences that involves.

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Aside from these so-called “genuine error” provisions, excess contributions can also be refunded as a lump sum where the total contributions paid exceed the maximum amount on which the individual is entitled to receive tax relief.

Also relevant to year-end tax planning are some of the nuances which apply to the dates HMRC deems a contribution to have been “paid”.

So as the rush to get contributions in before tax year end gathers momentum, we thought a brief review of these areas of pension law might be helpful.

Refund of excess contributions lump sum 

Where contributions paid exceed the amount at which the individual is entitled to receive tax relief, the scheme can repay the excess contributions to the member without causing an unauthorised payment.

This lump sum must be paid within six years of the end of the relevant tax year and is paid tax-free, reflecting the fact that no tax relief has been granted on the contributions being refunded.

Any interest paid under scheme rules in addition to the lump sum may, however, be taxable under self-assessment.    

This form of refund is commonly paid in circumstances where individuals do not know how much their relevant UK earnings for the year will be.

If their earnings for the tax year turn out to be less than the contributions paid, then the excess will not attract tax relief and may be refunded to the member.

Contributions exceeding relevant UK earnings should not be confused with contributions which attract tax relief, but which cause an annual allowance charge to be incurred.

In case of the latter, the client’s scheme will not normally be able to pay a refund of contributions as an authorised payment unless the “genuine error” conditions are met. 

What is a genuine error?

HMRC guidance states that a refund in respect of a contribution which has been paid “such that there was no intention to make a payment to that extent or at all”, and which is rectified as soon as possible, will not be an unauthorised payment.

The circumstances under which HMRC has considered these conditions to have been met have historically been limited to those where the error has been entirely beyond the control of the member.