This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
The genuine errors guidance in HMRC’s Pensions Tax Manual relates to a payment or contribution, through the HMRC approved scheme administrator, going into a pension scheme or a payment going out of a scheme where a genuine error has been made.
The HMRC guidance provides examples of circumstances where a payment or contribution can be treated as a genuine error rather than an unauthorised payment (which would result in tax charges).
HMRC acknowledge that, despite a scheme administrator putting all the appropriate checks in place in their administration systems, errors may still happen that could result in:
- a payment or contribution being made that was not intended, or
- incorrect or late information being given to a scheme administrator.
In theory, if a payment or contribution is made in genuine error but the error is spotted and rectified as soon as possible, then the payment or contribution would not be treated as unauthorised and would not need to be reported to HMRC. The error could be spotted by someone involved with the administration of the scheme, by the recipient of the payment, by a bank or by an adviser.
In fact, HMRC has confirmed that the genuine errors guidance can be applied to the actions of an adviser where the following applies:
- there’s a clear authority for the IFA or agent to act on behalf of the member.
- there’s a clear instruction from the member as to what form the transaction should take.
- as a result of a clerical error the form of the transaction is not what the member intended.
- the error is spotted and reported to the scheme immediately.
- had the error been made by the member the scheme administrator would have applied the genuine errors guidance.
Conversely, the genuine errors guidance can’t be applied where:
- a member has changed their mind (for example, about a contribution that’s been paid or a benefit that they’ve taken).
- the error is more than clerical.
- an adviser has given advice they now regret and wishes to undo the transaction.
There are very limited circumstances where contributions can be refunded, such as:
- where a cancellation notice is returned within the time limit.
- where an auto-enrolled worker opts out within the time limit.
- as a short service refund lump sum from an occupational pension scheme.
- where an individual pays personal contributions that exceed 100% of their relevant UK earnings – this is called a refund of excess contributions lump sum.
- where a genuine error has occurred.
A refund is not available where a:
- a member changes their mind outside of the cancellation or opt-out period.
- a member has exceeded their annual allowance (either the standard annual allowance, the money purchase annual allowance or the tapered annual allowance).
To expand on the final bullet point, if someone exceeds their annual allowance, it’s not possible to refund the ‘excess’ contributions to avoid the annual allowance tax charge. However, a refund of excess contributions lump sum could be made that results in someone who was previously over their annual allowance limit falling back under it.
In practice, most of the situations where genuine errors occur involve requests for the refund of contributions. Here are some examples of when an error could arise that could result in a request for contributions to be refunded:
- an employer automatically deducts a pension contribution from a new employee’s first salary even though the employee didn’t intend to join the scheme. The provider is asked to refund the contribution and does so immediately.
- a member instructs their bank to stop the pension contributions made by direct debit from their bank account. The bank fails to do this and contributions keep being made from the bank account. The contributions made in error can be refunded and aren’t treated as unauthorised.
- an employer deducts contributions from an employee’s salary and passes these to the pension scheme along with its own contributions. The employee subsequently leaves service so the contributions into the scheme should stop automatically. The employer is unable to amend its direct debit in time to stop some payments being made after the employee has left. As the contractual arrangement had stopped, a refund of those contributions can be made and wouldn’t be an unauthorised payment.
- an employee agrees to pay contributions to their employer’s pension scheme of 5% of their salary, to be deducted from their pay. The employer deducts 15% in error. Rather than adjust the level of future monthly contributions, the amount of the overpayment could be refunded as a genuine error.
The guidance also means that enhanced protection or fixed protection would not be lost simply because, for example, a direct debit payment was made in error despite an instruction to cancel having been given. Similarly, enhanced protection or fixed protection should not be lost if an employee opted out of joining their employer’s pension scheme or was not meant to join because of the fund protection held but was inadvertently added to the scheme in error.
For refunds of contributions under the genuine error rules, the intention is that the amount received in error should be refunded. So, the actual contributions paid in error are refunded and should be treated as if they were never made. Our understanding is that there isn’t a provision in the legislation or HMRC guidance to adjust a refund, made under the genuine error rules for investment gain or loss. Essentially, any investment gain or loss is ignored when making the refund and will likely be absorbed by the provider or scheme.
Where a contribution has been paid in error and is subsequently refunded, any tax relief that the scheme administrator has claimed under relief at source must be repaid to HMRC. This may be done by the scheme administrator adjusting the next claim made to HMRC or alternatively by direct payment to HMRC.
Similarly, any tax relief given under a net pay arrangement or by a claim must be corrected so that no tax relief is given or claimed in respect of any contributions that are refunded.
Where an employer’s contributions are refunded, any claim for corporation tax relief would have to be adjusted accordingly.
The facts of each case will determine whether or not a genuine error has been made. Typically, most errors will be cause by administrative failures, or by circumstances beyond the control of the scheme making the payment or party making the contribution.
Determining whether a genuine error has occurred will not always be clear cut and evidence may need to be obtained (particularly from around the time the error occurred) to provide proof that a mistake has been made. For example, an email or letter between an employee and their employer requesting that contributions are stopped, or that the employee doesn’t want to join a pension scheme, could be used to support a request for the return of contributions paid.
When a scheme is trying to determine whether the genuine errors guidance could apply, they should seek to obtain any evidence they think would be necessary and document the reasoning behind their final decision.