Following announcements made in Budget 2016, changes to pension tax rules have now come into force with a reduction in the tax rate chargeable on serious ill-health lump sums paid to individuals who have reached age 75
The current 45% tax charge on serious ill-health lump sums will be taxed at the individual’s marginal rate from 16 September, as set out in the Finance Bill 2016.
The new rules also remove the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed and enable the full amount of a dependant's benefits to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies.
Going forward, pension scheme administrators will have to report lump sums through real time information (RTI) reporting, rather than the existing method of reporting payments on the accounting for tax return (AFT). The final AFT which can be used for reporting this issue is the 1 July to 30 September 2016 return, due to be submitted by 14 November 2016.
Although the final AFT reporting deadline is November, HMRC has confirmed that it will not be in a position to release the necessary RTI software amendments in October as originally planned.
Details of the new reporting fields for serious ill-health payments will now be released in December 2016. HMRC stated that it is ‘sorry for any inconvenience caused by this delay’.
During this period, HMRC has confirmed that these payments need to be reported through RTI. The latest HMRC guidance states: ‘If you have a tax code for your member for the current year you should operate this code on a week 1/month 1 basis against any serious ill health lump sum payment made.’
If not HMRC recommends the following approach should be taken:
- deduct tax using emergency code on a week 1/month 1 basis;
- set the occupational pension indicator;
- use the date of payment as the leaving date on their payroll record so this is sent to HMRC when you report your payroll information (a starting date or an entry in the annual amount of Occupational Pension field is not required); and
- prepare a P45 and give it to the pension recipient.
The taxable element of the lump sum, or sums, paid in the ‘taxable pay to date’ and the ‘taxable pay in this period’ fields should also be entered on the full payment submission (FPS).
Pension members who have received an emergency code for a serious ill health lump sum payment will have to use form P53Z form to reclaim in year any excess tax paid.
The update was released in HMRC Pension schemes newsletter 81 - September 2016, published on 27 September.