All transactions between the pension scheme and members must be on strict
commercial terms. Any “unauthorised payments” to members (which includes any
transaction between the member and the fund on uncommercial terms) are treated
as the member’s taxable income, subject to PAYE. The fund also must itself pay
a 40% tax charge, although it can claim credit of up to 25% for tax paid by the
member. This can lead to a quite expensive tax.
charge.
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Example
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Phileas receives an unauthorised payment of
£10,000 from his pension fund. The scheme
deducts £4,000 under PAYE so that Phileas only
receives £6,000.
The scheme itself must pay £4,000 of tax, but is
entitled to claim credit for £2,500 of the tax
suffered by Phileas. The tax cost to the scheme
is therefore £1,500.
As a result of the unauthorised payment, Phileas
has received £6,000 at a total tax cost of £5,500. This is the equivalent of a tax charge of 47.8%.
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If a pension scheme makes unauthorised payments to members in excess of 25% of the fund, there is a further penalty of up to 15%, together with the possibility that the scheme will have its tax-approved status withdrawn.
In addition to the unauthorised payment charge, members will be subject to a benefit-in-kind charge if they are allowed to use assets owned by the pension fund on non-commercial terms. This would include the ability to live rent-free in residential property owned by the fund. Tax will be charged in the same way that benefits in kind supplied by an employer are taxed.
One interesting omission from the new proposals is any mention of National Insurance on pension benefits in kind. It is possible that this may be rectified by “A Day”, but at present there appears to be no charge to Class 1A NI contributions if a benefit is provided by the pension scheme rather than the employer. This could offer valuable planning opportunities to owner-managed companies.
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