What are authorised and unauthorised payments?
In R04 and FA2, you may need to be able to distinguish between payments that are permitted by Her Majesty’s Revenue and Customs (HMRC), i.e. authorised payments, and those that are not, i.e. unauthorised payments. You should also be aware of the consequences of unauthorised payments for both the member and the pension scheme.
Authorised payments are those that HMRC states in their regulations can be made without the imposition of tax penalties.
They can be divided into member payments and employer payments:
|Authorised member payments||Authorised employer payments|
|Pension payments at retirement||Authorised surplus payments|
|Lump sum payments at retirement||Compensation payments|
|Pension death benefits||Authorised employer loans|
|Lump sum death benefits||Scheme administration payments|
An unauthorised payment is simply any member or employer payment that is not authorised by HMRC under their regulations. For example, paying out a tax-free pension commencement lump sum (PCLS) in excess of the 25% limit.
In order to discourage them, unauthorised payments are subject to a range of penalties.In the CII's R04 and FA2 exams, you may need to be able to distinguish between authorised and unauthorised payments. Click To Tweet
Unauthorised payments charge
This is 40% of the unauthorised payment.
Where the member is alive, they will bear the tax charge; if it is made after their death, the recipient of the payment will be liable.
Unauthorised payments surcharge
This is 15% of the unauthorised payment and is in addition to the unauthorised payments charge.
It is payable when the value of unauthorised member payments exceeds 25% of their pension rights or when the value of unauthorised employer payments exceeds 25% of the value of the scheme’s assets.
For member payments, the surcharge is payable by the member if they are still living or by the recipient if they are not. For employer payments, the surcharge is payable by the sponsoring employer.
Scheme sanction charge
An unauthorised payment is classed as a chargeable payment. Chargeable payments incur a scheme sanction charge of 40%. This is payable by the scheme administrator.
However, the tax due is reduced by the lower of the tax paid on the unauthorised payment(s) or 25% of chargeable payments that are ‘tax paid’ (i.e. where the unauthorised payment charge has been paid).
To finish off, let’s take a look at an example and see how this works in practice.
Simon is a member of a registered pension scheme. The scheme makes an unauthorised payment of £5,000 to him. He therefore pays an unauthorised payments charge of £5,000 @ 40% = £2,000.
An unauthorised payment is a scheme chargeable payment and therefore incurs a scheme sanction charge of 40% of £5,000 = £2,000.
The scheme’s liability is reduced by the lower of the tax paid by Simon (£2,000) or 25% of the scheme chargeable payment (£5,000 @ 25% = £1,250).
The scheme sanction charge payable by the scheme administrator is, therefore, £2,000 – £1,250 = £750.
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