Taxation of pensions and Real Time Information reporting to HM Revenue & Customs

All income drawdown pensions are subject to income tax on a Pay As You Earn (PAYE) basis and it is crucial that systems are in place to ensure that the tax is correctly remitted on time to HM Revenue & Customs (HMRC) so that penalties are not incurred.

This is particularly important following the introduction of Real Time Information (RTI). This was introduced with effect from April 2013 and was one of the biggest changes to hit PAYE since it was introduced.

From that date all but a handful of UK employers and pension providers will have to electronically submit information to HMRC about PAYE deductions as they are made, instead of annually. All employers had to comply by October 2013. It should be noted that for ‘employer’ you should read ‘pension payroll’.

RTI reporting will become an integral part of a pension payroll activity with data being passed on far more accurately and more timely than previously. This necessitates a Full Payment Submission (FPS) being submitted electronically for each pensioner every time a payment is made to them, on or before the payment date shown on the FPS.

Nil returns – or a Nil Employer Payment Summary - are required by the 19th of the following tax month, otherwise it is assumed a payment has been missed and penalties will be levied.

RTI data needed to be submitted from April 2013, with penalties applying to late filing expected to be introduced from 2013/14 – however, in their latest newsletter the Revenue have confirmed that penalties will now be enforced for failing to file PAYE submissions on time:

  • From 6 October 2014 for employers with 50 or more employees (pensioners) in a PAYE scheme
  • From 6 March 2015 for all other schemes

To avoid such penalties - £100 being the monthly filing penalty per PAYE scheme (for nine or less employees, with an upward sliding scale for more employees), it is important that tax is deducted from any gross pension before the net amount is paid. This can be achieved in one of three ways:-

  • You could operate a PAYE scheme in accordance with the RTI rules, although software will be required.
  • You could ask another party, such as your accountant to register the scheme for PAYE, who will then comply with RTI, (Barnett Waddingham can assist with appointing a payroll provider if you prefer). 
  • If you are a business owner, then you may want to outsource the payroll function to your staff who run the company’s payroll. It should be noted that a separate PAYE reference for the scheme is needed and we would counsel against the company actually processing the money. 

Remember, National Insurance is not deducted from pensions.

Find out more about Self Invested Pensions

To learn about our SIPP and SSAS offering, including our Flexible SIPP, or to take our SSAS quizzes please visit the Self Invested Pensions area on our website

Self Invested Pensions