Members of public sector pension schemes could be forced to pay retrospective tax bills due to changes to their pensions following a court ruling, according to the government.
In a written statement to parliament yesterday (March 25), John Glen, economic secretary to the Treasury, said relevant members will be allowed to choose whether they accrued service in the old or new scheme under proposals to comply with the McCloud judgment.
The issue dates back to 2015, when a defined benefit pension scheme for judges and firefighters was closed for younger members but protected older members from the downgrade.
A dispute brought by firefighters and judges in March of that year, known as the McCloud case, argued that by protecting older members the government was discriminating against the younger ones based on age.
In December 2018 the Court of Appeal agreed that discrimination had taken place, and in June 2019 the Supreme Court refused the government’s application to appeal the court case, which marked the end of the legal process.
To right the wrong the government was thought to reinstate workers to the closed 2015 scheme but the Home Office later warned that some members may be worse off when moved back to the old scheme.
Mr Glen has now said members will be able to chose between the schemes but he warned if their tax position changes as a result of their decision, the government could consider tax paid back to 2015-16.
This means civil servants could potentially be hit with a tax bill from HM Revenue and Customs if it turns out they hadn’t paid the right amount of tax in previous years.
On the other hand, they could receive a tax rebate from HMRC if it finds they paid too much tax in previous years due to their change in pension scheme.
Mr Glen said: “The government will provide more detail later in the year, but if an individual’s pension circumstances change as a result, the government may also need to consider whether previous tax years back to 2015-16 should be re-opened in relation to their pension.”
Steve Webb, partner at Lane Clark & Peacock said making these calculations will be extremely complex and individuals would be best to seek the help of an adviser.
Mr Webb said: “If the government goes ahead with its plans, complex calculations will need to be made for millions of public sector workers, including retired members, to help them decide which scheme would be of most benefit.
“Worse still, there is a chance that retrospective changes to pensions could affect tax calculations going back several years.
“Members will need access to good advice to make the right choice and the government has not yet made it clear who will pay for this.
“There is a strong case for ministers to waive any knock-on consequences for tax bills for previous years, otherwise the decision could be extremely complex for some workers.”