Watch out for new rules on tax relief reclaims

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A new tax charge on excess tax relief reclaims marks a good point to review the rules around contribution refunds and tax relief eligibility.

A change which took effect from the start of the current tax year and has largely slipped under the radar creates new deadlines for repaying tax relief when too much has been claimed. This will generally occur when some or all of a contribution has been refunded.

The updated regulations require any excess relief claimed to be paid back to HMRC within a 90-day window. This period begins with the day the administrator first becomes aware of the excess and, if this deadline is missed, interest is chargeable at a rate of 3%. The really important consideration is that the interest isn’t just charged for the period by which the 90-day window is exceeded, but all the way back to the date the excess relief was claimed on the original contribution.

In most circumstances, once pension contributions have been paid you can’t get this money back until you come to take benefits. Like most pension rules though, there are a couple of exceptions which can create a need for refunds of contributions and tax relief.

Firstly, if an excess personal contribution is paid the tax relief must be refunded to HMRC. This happens when someone has made a contribution above their earnings for the tax year. This is not uncommon for the self-employed, who may guesstimate earnings and make a contribution early in the tax year. The earliest the excess can be confirmed is 6 April in the following tax year. Up to 5 April there is still potential for more earnings.

The 90-day clock starts ticking once the scheme administrator is informed of the excess. The administrator will require: confirmation from an accountant, P60, month 12 payslip or completed self-assessment as proof of earnings. Regarding how RAS works, interim claims are made monthly, with each tax month running from the 6th of one month to the 5th of the next month, these then have a filing deadline of the last working day of that month.

The key message is, get as much information as possible together before you tell the scheme administrator of the excess. Maybe even ask a theoretical “if I had a client who did xxx…what do you need?” type question before giving any client-specific details. Not all administrators will have the same requirements.

The second area where refunds may be needed relates to ‘genuine errors’. These are generally mistakes outside of the client’s control. This is already a contentious area, as HMRC’s and your scheme administrator’s views of a genuine error may not be the same as yours or your clients.

Under the new regime the chances of HMRC looking at any particular case just got a lot higher. In addition to the 90-day deadline, HMRC also now has to be provided with details of all cases in which a repayment of excess relief has been made. This specifies the member details and the reason the excess claim was made. This is information that hasn’t needed to be provided previously, and will make it far easier for HMRC to investigate instances where refunds have been given.

It may well be the case that administrators who’ve historically been generous in their interpretation of what constitutes a genuine error will have to change their stance.

Technical Consultant

Before starting at AJ Bell Grant studied Forensic Science, Analytical Science and Law in Sheffield, graduating in 2013. Prior to University he studied Chemistry, Physics, Maths and Design Technology at A-level. Grant started working at AJ Bell in the Benefits Department, progressing to be a Senior Administrator before moving to the Technical Resources Team in 2017. He is currently working towards a Diploma in Regulated Financial Planning and is part of the GETsmart Training Team, which involves conducting and scheduling internal technical training.