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.
There are very limited circumstances where personal contributions can be refunded. These are:
- 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 a genuine error has occurred.
- where an individual pays personal contributions that exceed 100% of their relevant UK earnings – this is called a refund of excess contributions lump sum.
It's the final bullet point, refund of excess contributions, that’s covered in this section of the guide.
Generally, gross personal contributions (including third-party contributions) are eligible for tax relief up to the greater of an individual's relevant UK earnings and £3,600. If personal contributions are paid which do not qualify for tax relief, they can be refunded. The refund is referred to by HM Revenue and Customs (HMRC) as a 'refund of excess contributions lump sum'.
A scheme's rules may require such a refund to be made if, for example, the administrator's systems are set up to process only tax-relievable personal contributions.
Any refund must be made within six years beginning on the last day of the tax year in which the excess contributions were made. Such refunds are classed as authorised payments, even if the refund is made after the member reaches age 75 during the six-year period.
If excess contributions were paid in the 2022/23 tax year, the refund would need to be made no later than 5 April 2029.
Any refund made after six years would not be a refund of excess contributions lump sum and unless it meets the conditions for another type of authorised payment to the member, it would be an unauthorised payment and taxed accordingly.
The maximum amount that can be refunded in any tax year is the amount of excess contributions paid in the relevant tax year, less any amount already refunded from any registered pension scheme for contributions paid in that tax year.
In the 2021/22 tax year, Charlotte paid contributions of £30,000 gross (£24,000 net) to a personal pension. Her relevant earnings for the tax year ended up being £25,000, meaning that she had exceeded the 100% of relevant UK earnings limit. As only £25,000 of the £30,000 gross contributions paid can receive tax relief, the provider refunds the £5,000 excess as they cannot accept personal contributions that aren’t eligible for tax relief. The refund made to Charlotte is £4,000 net with £1,000 being repaid to HMRC, representing the tax relief claimed on the refunded contributions.
There is no income tax charge payable on a refund of excess contributions lump sum.
It’s not possible to refund personal contributions just because someone has paid in more than the annual allowance and wants to avoid an annual allowance tax charge. However, if a refund of excess contributions lump sum is made, it won’t be counted as a pension input amount for the relevant pension input period (the tax year). This means that it won’t count towards the annual allowance for that tax year. So, if a refund results in bringing someone who was previously over the annual allowance limit back under the limit, then this won’t result in an annual allowance charge.
In the 2023/24 tax year, Harry had earnings of £58,000 but paid contributions of £62,000 gross to his personal pension. He can be paid a refund of £4,000 gross as a refund of excess contributions lump sum. His annual allowance is £60,000 so there will be no annual allowance charge as the refund has brought his pension input amount below his annual allowance.
In the 2023/24 tax year, Sandra had earnings of £70,000 but paid contributions of £75,000 gross to her SIPP. She can only be paid a refund of £5,000 gross as a refund of excess contributions lump sum. Her annual allowance is £60,000 so there will be an annual allowance charge on the extra £10,000 (£70,000 - £60,000) contributions she paid over her annual allowance, assuming she has no carry forward available.