The likelihood that clients will leave tax year end retirement planning to the last minute makes it important for advisers to understand the date contributions are deemed to have been paid from a tax relief and annual allowance (AA) perspective. This applies to clients with both workplace and individual plans.
HMRC continues to take an uncompromising approach to the application of ‘genuine error’ criteria. A refund of contributions can only generally be made as a result of a mistake, if the mistake was beyond the member’s control. While recent case law has challenged this hard-line approach, it remains better to understand when contributions will be deemed as applied, and to plan accordingly rather than run the risk of any dispute.
The importance of contribution methods
The contribution method dictates how the deemed contribution date is determined:
| Contribution method | Deemed date of contribution |
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Member cheque payments
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The date the cheque is received by the Scheme Administrator, as long as the contribution is accepted.
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Member debit/credit card payments
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The date the payment details are received by the Scheme Administrator.
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Member direct debit payments
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The date the member has authorised that money may be taken from their account, as long as the money is actually received by the Scheme Administrator.
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Member payroll deduction under a relief at source scheme, such as a GPP
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The date the employer’s cheque is received by the Scheme Administrator, or the date the employer has authorised that money may be taken from their bank account. If there’s a delay between the contribution being deducted from the member’s pay and the date the scheme is authorised to take the money from the employer’s bank account, then the date the provider receives the money applies.
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Member payroll deduction under a net pay scheme. (occupational schemes only)
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The date the contributions are deducted from the member’s pay.
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Salary exchange contributions
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Legally, these are employer pension contributions and are treated as such for payment date purposes.
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Employer contributions
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The date the contribution is credited by the Scheme Administrator. For the purposes of providing pension savings statements (PSS) to members, the date used to deem when the contribution was paid may be a notional due date.
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The challenges with net pay schemes
Net pay schemes can present particular issues for advisers as information on payroll deduction dates isn’t always available. In these cases, for AA purposes HMRC allows schemes to use either the date the money was received by the scheme, or an estimate of the date the money was deducted from the member’s salary.
Although helpful to schemes, this alternative approach can cause issues for advisers as a contribution on which tax relief is granted in one year, may be recorded and treated for AA purposes as applying in the following tax year.
If their year-end contribution is sizeable, there are potentially some significant consequences:
If the contribution is deemed as paid in the later tax year, it may be disadvantageous for the client when it comes to tax. They may not have carry forward from later tax years, and pension contributions for the year that the contribution is deemed to fall may not be known.
If a contribution isn’t deemed as paid in the tax year expected, carry forward from 3 years earlier may be lost.
If the contribution isn’t included, the total pension contributions under the employer’s scheme for the earlier year may not exceed the AA. This means they won’t be entitled to automatically receive a PSS for that year (although the client or their adviser can request one)
Members’ responsibilities
It’s worth remembering that regardless of the information contained in a PSS, individuals remain responsible for working out if they’re liable to an AA charge and if so, to declare this on their self- assessment form. The pensions tax manual (see PTM053200) states that members may rely on the information contained in their PSS where the scheme has relied on the alternative approach described above, and not that they must.
How you can help
You can choose to recommend reliance on the ’proper’ deemed date of contribution – the date the contribution was deducted from your client’s pay – if it’s in their best interests to do so. Any such recommendation should, however, always be accompanied by telling your client to keep their payslips as evidence of the payroll deduction date. Remember, Scheme Administrators must provide HMRC with details of members who’ve automatically received a PSS. So the evidence may be needed to deal with any query.
To avoid these potential pitfalls we suggest that where your client is a member of a net pay scheme, you should consider:
- checking PSS small print for scheme disclosures on whether and how the scheme is relying on this HMRC easement, and/or
- raising a query with the scheme itself on single premium contribution impacts
- keeping payslips and other evidence of payroll deduction dates as necessary.
