Tax treatment of pension overpayments
Tax treatment of pension overpayments

The following Pensions practice note provides comprehensive and up to date legal information covering:

  • Tax treatment of pension overpayments
  • Are overpayments unauthorised member payments?
  • Exceptions under the Authorised Payment Regs
  • Pensions paid in error
  • Pensions paid after the discovery of the error
  • Pensions continuing to be paid after death
  • Overpaid pension commencement lump sum
  • General comments
  • HMRC’s safe harbour for ‘genuine errors’
  • What if the trustees cannot or will not recover the overpayment?
  • More...

Pension schemes sometimes make payments to members that are not in accordance with scheme rules or that may breach other tax or legal regulations. As pensions is a complex area, understandably, incorrect payments may be made, commonly in the form of overpayments.

Trustees are compelled to recover as much of these overpayments as reasonably possible—for more information, see Practice Note: Overpayment of pension benefits.

Overpayments can lead to tax consequences for members, schemes and employers if they are considered to be ‘unauthorised payments’.

Are overpayments unauthorised member payments?

An unauthorised member payment is effectively a payment to a member which falls outside the authorised member payment rules set out in section 164 of the Finance Act 2004 (FA 2004). For more information on authorised payments generally, see Practice Note: Authorised and unauthorised payments.

An overpayment will be an unauthorised member payment, unless it falls within:

  1. an exception set out in the Registered Pension Schemes (Authorised Payments) Regulations 2009, SI 2009/1171 (the Authorised Payment Regs)—for more information, see Exceptions under the Authorised Payment Regs, below

  2. the ‘genuine error’ safe harbour devised by HMRC—for more information, see HMRC’s safe harbour for ‘genuine errors’, below

If the overpayment is an unauthorised member payment, it will be subject to punitive tax charges. For more information on the tax charges applicable in such circumstances and possible relaxations in the context of overpayments, see Tax penalties

Popular documents