The FA 2004 pensions tax regime distinguishes between authorised payments and unauthorised payments. In a black-and-white way, any payment which is not an authorised payment is unauthorised, and attracts significant tax penalties.

In new guidance [PDF] published today, HMRC sensibly recognises that no matter how good an administration system is, errors may still occur which could result in an inadvertent payment being made, or the receipt of a contribution into the scheme, that was not intended. Equally, errors could occur as a result of incorrect information or late information being given to the scheme, such as by, or in respect of, a member or the employer of a member or by a member's or employer's bank. Exceptions should be made in such cases, so nobody gets hit with an undeserved tax charge.

In the following circumstances, therefore, an inadvertent payment caused by a genuine error won't be regarded as an unauthorised payment or a contribution into the scheme, as the case may be:

A 'Payments' that are not unauthorised payments

• the payment is made in genuine error, such that there was no intention to make a payment to that extent or at all, and
• the erroneous payment is spotted by someone involved with the management of the scheme (or the recipient of the payment or the recipient's adviser might have brought the matter to the attention of the scheme managers), and
• the error is rectified as soon as reasonably possible.

There is no requirement for the scheme administrator to report a payment made in these circumstances as an unauthorised payment, as the payment is not an unauthorised payment for the purpose of the tax rules relating to registered pension schemes.

B. Inadvertent unauthorised payments: pension instalments not exceeding £250 in total

In the real world it is entirely possible that an instalment of pension might be paid a few days before the scheme administrator is told that the member has died, technically triggering the unauthorised payment rules. Processing errors may also occur. The guidance states that where the total overpaid pension instalments paid after 5 April 2006 to, or in respect of, a particular member does not exceed £250,

• for its own reasons of cost administration, under its Collection and Management powers, HMRC will not seek to collect the tax that, in strictness, is due in respect of the unauthorised payment (although the payment remains an unauthorised payment), and
• the scheme administrator does not have to report the unauthorised payment to HMRC, and
• the unauthorised payment does not have to be returned on the recipient's self-assessment tax return or, otherwise, be notified to HMRC.

Note:

1. If the aggregate overpayment exceeds £250, then all of the overpayment is chargeable as an unauthorised payment (i.e. one cannot deduct £250 as if it were an allowance, which it is not).
2. For this purpose, the £250 threshold applies to the aggregate of the 'gross' amount of the overpayments and not to the 'net' amount after the deduction of any tax or any other deduction.
3. This £250 threshold applies to instalments of pension paid in error that are unauthorised payments only and not to unauthorised payments that are lump sum payments.

This confirms and amplifies the announcement last September in Newsletter 19 - see also Aries article.

C. 'Contributions' to pension schemes that are not contributions

If, as part of the day to day administration of the pension scheme, the scheme receives contributions from (or on behalf of) of a member or from an employer in genuine error, the repayment to the payer of the sums inadvertently received by the scheme will not be an unauthorised payment. The examples of such errors given in the guidance are banking errors, eg failure to cancel a direct debit as instructed. A repayment of contributions paid during a statutory 'cooling off' period after the member changes his or her mind will not be an unauthorised payment either. The scheme administrator must rectify any tax relief claimed or given in respect of erroneous contributions.