Contribution Refunds

Contents

When Can Contributions Be Refunded?

The payment of a refund of contributions validly held by a registered pension scheme, is an ‘authorised payment’ for tax purposes only if it meets the conditions for either a:

• short service refund lump sum, or a
• refund of excess contributions lump sum.

If, on the other hand, membership is cancelled within the ‘cooling off period’ specified by the appropriate Regulatory Body, contributions paid within that period may be refunded.

There is also a refund allowed under the Genuine Error Rules.

This article will cover the refund of excess contributions and genuine errors.

Short Service Refunds will not be covered as these are linked to occupational pension schemes, the schemes operated by SS&C are personal schemes and as such are not covered by this rule.

If you wish to know more about Short Service Refunds please see the link below:

PTM045000 - Contributions: refunds of contributions - HMRC internal manual - GOV.UK (www.gov.uk)

Refund Of Excess Contribution Refund

Where a member has paid pension contributions in a tax year of more than the maximum amount that can receive tax relief the amount of contributions that cannot receive tax relief (the excess) may be repaid to the member.

The legislation refers to this as the ‘excess contributions condition’.  If this condition is met, the excess contributions can be paid to the member as a refund of excess contributions lump sum.

The payment must be made before the end of the period of six years beginning with the last day of the tax year in which the ‘excess contributions condition’ was met, that is the tax year in which the ‘excess’ contribution was paid.

A refund of excess contributions lump sum is not subject to any income tax charge.  It is paid tax-free.  This reflects the fact that no tax relief has been granted on the contributions being refunded in the first place.

If tax has been reclaimed this will be refunded to the HMRC via the Relief at Source returns.

Example of an Excess Contribution:

Jonathan was self-employed and made a contribution in the 2022/23 tax year for £35,000.00. Once the end of year accounts had been finalised it showed that Jonathan had relevant earnings of £30,000.00

As £5,000.00 was paid in excess of earnings, if the scheme rules allow the excess may be returned to the member.

Evidence required to process the refund

In order to justify the return of the payment we need to see supporting evidence showing the income in the tax year in question, we will require either:

• P60,
• P45 if left employment; or
• Completed tax return

Statutory ‘cooling off’ periods.

Where, in respect of a registered pension scheme:

• a member pays contributions to the scheme, and
• the member subsequently changes his or her mind about the payment of those contributions under a statutory ‘cooling off’ period, and
• those contributions are returned to the member.

This repayment will not be an unauthorised member payment.

Similarly, if a transfer is made to another registered pension scheme and the member is entitled to change their mind under a statutory cooling-off provision, the repayment of the transfer to the original registered pension scheme will not be regarded as an unauthorised payment.

The cooling off period only applies to the initial contribution, SS&C do not offer this on additional regular or 

ad hoc contributions.

If the payment has been made and a request for tax relief has been made before the refund is requested the HMRC tax relief will be refunded to the HMRC via an adjustment in the next HMRC return.

Genuine Errors

As part of the day-to-day administration of a registered pension scheme, it is possible that a genuine error could result in a contribution seemingly being made into the scheme, but which is not actually a contribution at all for the purpose of the tax rules applying to the scheme.

The genuine error guidelines only cover circumstances where the member’s precise intention was not carried out. They do not cover circumstances where there has been a misunderstanding of the rules or where the member has simply changed their mind after the fact. 

Each request would be looked at on its own merits and full details must be provided to allow us to determine if a genuine error has occurred.

Examples of Genuine Errors

The definition of a genuine error is very narrowly defined, and some examples given by HMRC are:

• where a bank doesn’t act on an instruction to cancel a direct debit or standing order
• where an employer deducts a larger employee contribution from an employee’s salary than they should
• where an employer inadvertently pays some contributions after the employee leaves service

Additional information can be found in the following section of the Pension Tax Manual: PTM146600 - Other authorised payments: genuine errors: “contributions” to a pension scheme that are not contributions - HMRC internal manual - GOV.UK (www.gov.uk)

When can a refund not be issued?

Exceeding the annual allowance is not a reason for a refund. HMRC guidance clarifies that the annual allowance charge cannot be avoided by simply undoing a contribution. In fact, not only will the individual still be liable for the charge, if the contribution was refunded then they would likely also face an unauthorised payment tax charge.