Refunding excess personal contributions
These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.Tue Apr 16 09:39:00 GST 2019 Back to results
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 that is covered in the FAQs below.
Can a member get a refund if they have paid too much contributions?(Expand content) (Minimise content)
Where personal contributions (including third party contributions) have been made in excess of 100% of relevant UK earnings, (and in excess of £3,600, if tax relief is given by relief at source), the excess contributions aren’t entitled to receive tax relief, so they can be refunded by the provider or scheme. The refund is referred to by HM Revenue & Customs (HMRC) as a ‘refund of excess contributions lump sum’.
Any refund must be made within 6 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.
Any refund made after 6 years would not be a refund of excess contributions and unless it meets the conditions for another 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. There is no income tax charge payable on a refund of excess contributions lump sum.
In the 2018/19 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 re-paid to HMRC representing the tax relief claimed on the refunded contributions.
Can a refund of personal contributions prevent an annual allowance charge?(Expand content) (Minimise content)
It’s not possible to refund personal contributions just because someone exceeds the annual allowance in order to avoid an annual allowance tax charge. However, a refund of excess contributions lump sum could be made that results in someone who was previously over the annual allowance limit falling back under it.
To elaborate, if a refund of excess contributions lump sum is made in a pension input period (PIP) ending in the 2014/15 tax year or a subsequent tax year, then the refund will not be counted as a pension input amount for that PIP. This means that it will not be counted towards the annual allowance for that tax year. So, if a refund brings someone who was previously over the annual allowance limit back under the limit, then this will not result in an annual allowance charge.
In the 2018/19 tax year, Morris had earnings of £50,000 but paid contributions of £55,000 gross to a personal pension. He can only be paid a refund of £5,000 gross as a refund of excess contributions lump sum. His annual allowance is £40,000 so there will be an annual allowance charge on the extra £10,000 (£50,000 - £40,000) contributions he paid over the annual allowance assuming he has no carry forward available.
Refunds made in a PIP ending in the 2013/14 tax year or an earlier tax year did count as a pension input amount for that PIP. This meant that the refunded contributions were still counted towards the annual allowance for that tax year. So, so an annual allowance charge could still apply even if a refund brought someone who has previously over the annual allowance limit back under the limit.
You can access more information about refunding personal contributions in HMRC's Pensions Tax Manual, page PTM045000.
Pensions Technical Services