Contributions refund lump sums (CRLS)
As the anti-forestalling legislation was applicable immediately some individuals may find themselves in a position where a payment they have already made, perhaps in anticipation of the budget, will be subject to the special annual allowance charge.
For example a single payment that was not received before midnight of 22 April/9 December would be subject to the charge if it is over the special annual allowance that applies and was made by a high-income individual.
HMRC have acknowledged this and added an additional authorised lump sum payment which may be paid by scheme administrators, the contributions refund lump sum. In effect the individual can simply take back the money paid, net of tax, and the contribution is treated as if it never happened.
Previously payments could only be refunded as an authorised lump sum if they did not qualify for tax relief (the refund of excess contributions lump sum), or in the case of short service (short service refund lump sum).
How much can be refunded?
Only payments that are subject to the special annual allowance charge can be refunded.
The payment would also be subject to other "relevant deductions":
- any previous contributions refund lump sum(s)
- any pension debits taking effect in that tax year (divorce)
- any sums or assets transferred to another qualifying pension arrangement during the tax year
- any amounts crystallised during the tax year.
How does it work?
In order to qualify as a CRLS the payment cannot be paid in the same tax year as the payments were made. Therefore the earliest a CRLS can actually be paid is 6 April 2010.
This means the scheme administrator will already have reclaimed Relief at Source. They should not change this. When a CRLS is paid they must deduct 50% from the gross contribution in respect of the tax relief given and include it in the Accounting for Tax Return (AFT). The deduction will be 50% regardless of the actual amount of higher rate tax relief that applies.
The individual may also already have reported the excess payment on their tax return for the year in which the payment was made.
If this is the case, they must make an adjustment to their return when they receive the refund in order to avoid paying the 20% special annual allowance charge. It therefore makes sense to wait for the CRLS to be paid before submitting the tax return if possible.
Not all schemes will be able to offer a CRLS, it will be dependent on whether such refunds are allowable in the scheme rules.
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Note - The information provided is based on our current understanding of the 2009 Budget and associated documents and may be subject to alteration as a result of changes in legislation or practice.
Published 12 January 2010
Updated 9 March 2010