Additional clarity on HMRC’s GMP equalisation guidance on tax treatment

Additional clarity on HMRC’s GMP equalisation guidance on tax treatment

A member of the PLSA Executive sits on the HMRC working group on tax challenges, which has written the below to help clarify recently released HMRC GMP Equalisation guidance:

HMRC have given guidance on various pensions tax considerations when equalising benefits for the effects of inequalities in Guaranteed Minimum Pension in light of the Lloyds case. Many schemes are duly proceeding in particular with equalising benefits for members in receipt of pension and identifying the arrears of pensions due, with interest for late payment.

We are aware that there has been some confusion on the tax treatment of the interest element, in terms of tax due and the responsibilities (if any) of schemes to deduct that at source.

(This message is NOT about tax treatment of the arrears themselves which is covered explicitly in the HMRC guidance note referred to above.)

We understand that HMRC may include clarification in a future newsletter (possibly end of May); but, on general principles, have already confirmed the following to the industry members of the GMPe Working Group and HMRC have agreed that we can share this.

For the purpose of GMP equalisation:

  • (for pensions tax purposes) the interest payment should be treated as interest payment made in respect of a late payment of pension instalments.
  • the interest is likely to be “yearly interest” for tax purposes, and an obligation to withhold income tax is unlikely to arise under section 874 of Income Tax Act 2007, unless of course the payment falls under s874(1)(d) i.e. to a person whose usual place of abode is outside the UK.
  • In terms of the Personal Savings Allowance (PSA): the interest element should be covered by the PSA, although this is primarily a point for individuals and their particular circumstances. 

We hope this is useful to PLSA’s members and the wider pensions industry in managing payments and communications with scheme members.