Tax on lump sum pension payment not deducted

Make_Tax_Simple

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

I suggested sending them the tax due, and thought they could then pay the tax to HMRC and all would be good, and after getting nowhere I just sent them the tax amount (£500 as they have my tax code of BR basic rate).

I then received this response from Company B...

"Due to the incorrect tax-free amount of £2,500 being paid, we must ask for the full amount to be returned to avoid any additional tax charge.

I appreciate that you have returned an amount of £500. However, we must ask that you return the remaining amount of £2,000.

The reason we must request the full amount returned to us, is due to situations like this, in order to meet HMRC regulations, the full amount of the tax-free element paid must be returned.

If this isn’t returned, then you may also be liable to pay an additional tax charge from HMRC as you are in receipt of funds you are not entitled to receive."

So rather than doing some internal accounting they want me to send them £2,000 so that they can send £2,000 back to me.

Does anyone know if they are correct, as it would seem odd if I had to pay an additional tax charge due to their mistake (which they admit), and as I had already put the £2,000 into an ISA I really did not want to withdraw it for what seems like a pointless transfer to company B.

Baldytyke88

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

Each pension has its own 25% tax-free, so the highlighted text in your first sentence is wrong.

molerat

Baldytyke88 said:

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

Each pension has its own 25% tax-free, so the highlighted text in your first sentence is wrong.

Not if hey have already taken the maximum total allowable tax free amount

Make_Tax_Simple

Baldytyke88 said:

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

Each pension has its own 25% tax-free, so the highlighted text in your first sentence is wrong.

There is an overall limit of £268,275 from all pensions, and I reached this limit on my main pension (SIPP).

NoMore

Baldytyke88 said:

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

Each pension has its own 25% tax-free, so the highlighted text in your first sentence is wrong.

Not if they have already took the maximum lump sum from other pensions already. Which the op states they have. 

Each pension should ask when you withdraw if you have took previous tfls from other pensions in order to ascertain how much tax free is still available. This doesn’t appear to have happened to the op resulting in them getting tax free cash they were not entitled to.  

DRS1

Back to the OP's question I do not know the answer but I suspect company B are right that the whole payment needs to go back so they can pay it with the right tax deducted (which may not be £500).

It may be that the payment would otherwise be an unauthorised payment which has a sanction charge attached to it.

I may be making this up but I think it is probably best to do what they suggest.

sheramber

they do say  in order to meet HMRC regulations, the full amount of the tax-free element paid must be returned.

the payment will have been reported as paid without tax deducted. There is probably no way to rectify  that report without the money being credited back.

The sooner you return the money, the sooner you will get the correct amount of £2000 sent to you.

Hoenir

Make_Tax_Simple said:

So rather than doing some internal accounting they want me to send them £2,000 so that they can send £2,000 back to me.

Simplistic to say internal accounting. The entire original transaction will be need to reversed and processed correctly. Payroll dta being fed through to HMRC directly on a monthly basis. 

Informing them by letter when you drew the full cash lump sum originally would have been the best course of action. Phone calls result in notes that can easily get missed. When it comes to payroll processing. The note may well have not been actioned to after the event. With different teams responsible. 

Marcon

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

I suggested sending them the tax due, and thought they could then pay the tax to HMRC and all would be good, and after getting nowhere I just sent them the tax amount (£500 as they have my tax code of BR basic rate).

I then received this response from Company B...

"Due to the incorrect tax-free amount of £2,500 being paid, we must ask for the full amount to be returned to avoid any additional tax charge.

I appreciate that you have returned an amount of £500. However, we must ask that you return the remaining amount of £2,000.

The reason we must request the full amount returned to us, is due to situations like this, in order to meet HMRC regulations, the full amount of the tax-free element paid must be returned.

If this isn’t returned, then you may also be liable to pay an additional tax charge from HMRC as you are in receipt of funds you are not entitled to receive."

So rather than doing some internal accounting they want me to send them £2,000 so that they can send £2,000 back to me.

Does anyone know if they are correct, as it would seem odd if I had to pay an additional tax charge due to their mistake (which they admit), and as I had already put the £2,000 into an ISA I really did not want to withdraw it for what seems like a pointless transfer to company B.

They are correct - hidebound by HMRC regulations. 

If you aren't going to be maximising this year's ISA contribution, then taking out £2K and later paying in a 'new' £2K won't matter. If you have (or will) hit the maximum ISA contribution, if your money is in a flexible ISA, you can withdraw it to make the repayment and then put it back into the same ISA without it counting as an 'additional' contribution if the repayment is made in the same tax year. 

Make_Tax_Simple

Hoenir said:

Make_Tax_Simple said:

So rather than doing some internal accounting they want me to send them £2,000 so that they can send £2,000 back to me.

Simplistic to say internal accounting. The entire original transaction will be need to reversed and processed correctly. Payroll dta being fed through to HMRC directly on a monthly basis. 

Informing them by letter when you drew the full cash lump sum originally would have been the best course of action. Phone calls result in notes that can easily get missed. When it comes to payroll processing. The note may well have not been actioned to after the event. With different teams responsible. 

Agreed it was simplistic, but I did at one stage design the accounting end of systems for an insurer and always made sure that (with the correct authorisation controls) there was a way of putting through a manual journal to correct an error.

When I withdrew the initial amount from Company B I did have a letter attached to the form they supplied, plus 4 emails and a complaint process, so I would have thought this should have been enough. In addition they had copies of the documents from Company A and my bank showing the amounts I had received. What I didn't state in my original post is that Company B is a well known pension provider so they really should have had a box on the form to tick if full tax free amount had been utilised. 

Make_Tax_Simple

Marcon said:

Make_Tax_Simple said:

 Apologies for the long first post.....

A couple of years ago I took the maximum tax free lump sum of £268,275 (from a pension (with Company A), so my future lump sums from other pensions should be taxed.
Last tax year year I took a lump sum from a small pension (from company and after many delays I was paid the sum due with tax deducted (so all good on that one).

This year I phoned company B to request the balance be paid as a lump sum, and on the call I  reminded them that tax should be taken from the full amount. Unfortunately they paid me 25% tax free (£2500), so I got in touch to let them know they had made a mistake.

I suggested sending them the tax due, and thought they could then pay the tax to HMRC and all would be good, and after getting nowhere I just sent them the tax amount (£500 as they have my tax code of BR basic rate).

I then received this response from Company B...

"Due to the incorrect tax-free amount of £2,500 being paid, we must ask for the full amount to be returned to avoid any additional tax charge.

I appreciate that you have returned an amount of £500. However, we must ask that you return the remaining amount of £2,000.

The reason we must request the full amount returned to us, is due to situations like this, in order to meet HMRC regulations, the full amount of the tax-free element paid must be returned.

If this isn’t returned, then you may also be liable to pay an additional tax charge from HMRC as you are in receipt of funds you are not entitled to receive."

So rather than doing some internal accounting they want me to send them £2,000 so that they can send £2,000 back to me.

Does anyone know if they are correct, as it would seem odd if I had to pay an additional tax charge due to their mistake (which they admit), and as I had already put the £2,000 into an ISA I really did not want to withdraw it for what seems like a pointless transfer to company B.

They are correct - hidebound by HMRC regulations. 

If you aren't going to be maximising this year's ISA contribution, then taking out £2K and later paying in a 'new' £2K won't matter. If you have (or will) hit the maximum ISA contribution, if your money is in a flexible ISA, you can withdraw it to make the repayment and then put it back into the same ISA without it counting as an 'additional' contribution if the repayment is made in the same tax year. 

Thanks, I wasn't sure if they were correct on the regulations.

I had maximised the ISA, and unfortunately it is not flexible....   but luckily I will be able to borrow the money from my son. Might be more of an issue for others if for example the amount was larger and they had used it to pay off a mortgage.