Tax regulations have been announced relating to the age discrimination remedy in public sector pension schemes (the McCloud case). The main impacts are:
Reporting of annual allowance (AA) tax charge
Scheme members should not report their AA position for 2022 to 2023 through self assessment (where the deadline is 31 January 2024). Instead, a new reporting system will be used, Members will use information provided by their scheme administrator to send specified information to HM Revenue and Customs using an electronic form. Further guidance on the form will be published in due course.
Retired members will be able to use 'Scheme pays'
If a retired member finds their AA charge increases due to the age discrimination remedy then they can make a 'Scheme pays' election. The Scheme will then adjust the member's benefits to account for the increased tax payment.
Lifetime allowance (LTA) lump sum
The member's choice under the remedy could reduced the amount of LTA used. If the member had a LTA excess lump sum, then part or all of it may no longer be an LTA excess lump sum. These is a change in how this lump sum is taxed. The LTA charge on the revised excess lump sum rains the same, taxed at 55%. The LTA charge on the part of the lump sum that is no longer an excess lump sum is considered an authorised payment and will be taxed at 40%.
Serious ill health lump sum
The finance Act (No 2) 2023, removed the LTA charge and made a serious ill health lump sum in excess of the LTA, taxable as pension income.
Where:
- a top up to a serious ill health lump sum is paid due to the remedy after a member's death
- the top up is in excess of the member's LTA
then the excess is taxable as pension income.