Pensions: the tax implications of errors in the handling of members’ data

There are personal tax implications where the administration of the pensions system fails to identify people who have overpaid or underpaid their pension in a given year
- For instance, if your pension tier was too high in 2017-2018 (e.g. due to illness or maternity leave), you will have contributed too much towards your pension (and be due a refund). You will also have submitted a tax return (in January 2019) which claims tax relief on the contributions you made, even though those were higher than they should have been.
- Do HMRC regard that as having underpaid tax, and if so does it attract interest and/or financial penalties? If so, you have been disadvantaged by the failure of the pension system to process your forms in a timely fashion.
- Say you then receive a refund of £1000 in April 2019. Do HMRC regard that as income in the current tax year 2019/2020, or in the year it relates to (2017/2018)?
- If it is regarded as income now, and it pushes you from the 20% to the 40% income tax bracket, you have been financially disadvantaged to the tune of £200.
- This is complicated by the fact that currently it is impossible to submit your pension forms for a given year until c.12 months later, because they aren’t released until April the following year. Nevertheless, this highlights the need to get on and submit your end-of-year forms.
There are more significant, and exponentially more complex, tax implications where the administration of the pensions system erroneously reports someone’s annual allowance tax position, or delays a tax bill being identified
- Say you overpay towards your pension and thereby incur an annual allowance tax charge which you otherwise would not have attracted.
- You elect to pay this by scheme pays, effectively taking out a large loan from NHS Pensions against the ultimate value of your pension.
- Subsequently, it emerges your pension tier was miscalculated, and the reduction in your pensionable pay means you don’t have an AA charge to pay (or it’s smaller than expected).
- How is this unpicked with HMRC, given that all the complications of the income tax position above still apply?
- How is this unpicked with NHS Pensions, who have passed money on your behalf to HMRC and now need to reclaim that money and wipe out the associated scheme pays loan?
NHSE and PwC have kindly agreed to seek advice from HMRC and NHS Pensions on the above examples, given that they would financially disadvantage members.