Tax treatment of compensation payment

lisyloo

Hello,

I have received a compensation payment and I'm trying to find out whether I can get tax relief on it.
My pension company have so far said

"Pre A-Day such payments were not contributions, but Post A -Day we understand that compensation payments (such as FSA review cases) may be treated as contributions on or behalf of an employee."

I am trying to get a definitve answer to the "may" but it has taken 5 months to get that statement.

Does anyone know how I can confirm whether this payment can qualify?
The pension company are very slow in answering queries despite being chased.
It is an occupational money purchase scheme and not a group personal personal pension.
They do not claim tax relief on my behalf (contribution use to be added gross), so I would have to claim it myself.
I'm happy to do the claiming, it's the tax treatment I need clarification on.

Thanks

EdInvestor

Hard to see how it could be justified, assuming that you've already had tax relief on all contributions.

lisyloo

I agree with you.

But I pay my taxes based on legal obligation and not moral justification and therefore that should work both ways.

Debt_Free_Chick

lisyloo wrote: »

I agree with you.

But I pay my taxes based on legal obligation and not moral justification and therefore that should work both ways.

The provider is not being very clear here

...Post A -Day we understand that compensation payments may be treated as contributions on or behalf of an employee

Note that did not say "the employee's own contributions" or "deemed to be personal contributions, made by the employee".

I think they're not understanding the implications of what they've told you.

They are not your own contributions and won't be classed as such. If this is compensation for a transfer to a personal pension, the compensation is effectively a top-up to the original transfer value. It's like saying that the scheme should have paid out more, to give you a transfer that would make it worth your while. Such a top-up would have been closer to an employer contribution, but definitely not an employee transfer.

The fact that compensation might be treated as "a contribution" (but not an employee contribution) is relevant to the Annual Allowance .... which is a limit on the total contributions that can qualify for tax relief. In other words, for some people, the compensation might take them over the Annual Allowance!!! This is the point I think they're trying make, even though it doesn't directly answer the question you put to them.

Finally, compensation is a payment to rectify a loss. You wouldn't be paying your own money out to rectify the loss caused by someone else ... so it's definitely not "your contribution" and definitely not one on which you will get tax relief.

HTH

lisyloo

so it's definitely not "your contribution" and definitely not one on which you will get tax relief.

Thanks for the advice.
Can you confirm where that information came from or is it an opinion?
I'm not meaning that to sound negative but I need to get a definitive answer.

The reason I'm questioning it at all is that the Ombudsman at the FSO told me that I may be able to get tax relief (again I believe he used the word "may" rather than something definitive).

The compensation was for a mis-sold fund switch in an occupational money purchase scheme.

I have a feeling that you are both right because what you are saying is perfectly logical.
However I'm someone that would like a deinfitive answer otherwise it will bug me that I didn't properly get to the bottom of it.
I don't mind a definitive "no" but not ever sorting it out properly will be at the back of my mind until it's resolved.

EdInvestor

To get a definitive No I suggest you speak to HMRC. The formal Pension Misselling Review which dealt with most cases like yours 10 years ago was pretty extensive, involving hundreds of thousands,if not millions of people.

So someone should remember the rules.;)

lisyloo

Does look like they changed around A-day though which was relatively recent.

One of the things I didn't appreciate until recently is that it's an occupational scheme and therefore doesn't apply tax relief - my contributions used to come from gross salary.
With my current GPP my contributions come from NET salary and then tax relief is added.

As it's an old pension (I left the company about 10 years ago) I had forgotten how it worked.

Debt_Free_Chick

It's my understanding of the legislation, with my reasoning set out in the previous post.

You've already had tax relief on the contributions you made. Of course, if HMRC want to give you more, then take it

Just bear in mind that if they make a mistake, they'll take it back, too!

lisyloo

Ok thanks.

I have a feeling that the FSO man might have been thinking it was a GPP where tax relief (at basic rate) is automatically added to contributions and therefore it might have gone through a loophole here.

However it's not that type of scheme.
It's an occupation scheme where they are added gross i.e. my contribution came out first before I got paid so there was no NI or tax.