Blogger
Share this content
0
15
3637

Group Personal Pension Error

Client with approx 200 employees has been deducting pension contributions incorrectly for several years.

Employees contribute 5% of gross salary so for example:- 

Gross Monthly Salary £2,000

Pension deduction shown on payslip £100 (i.e. 5% of gross with no tax relief)

£100 is send to pension provider, pension provider recovers the tax from HMRC (thinking that company has given tax relief to employee).

So the employee's net pay has reduced by £100 instead of £80; the pension provider has recovered an extra £25 tax relief (as they assume the employee paid £125 less £25 tax relief).

Is this a PAYE violation?   If so is the company liable to fix this & repay the tax.

Does the pension provider repay the tax?

Has anyone came across this situation & how was it handled with HMRC/Pension provide?

Many thanks for any comments.

Replies

Please login or register to join the discussion.

Are you sure...

... is the pension contribution deducted from net or gross pay?  or more precisely is the employee's tax figure calculated on the £2,000 or £1,900?

My suspicion that it's the latter, which is the correct way to deal with employer pension contributions.

Thanks (0)

What is the taxable pay?

Although the gross is £2,000 what is shown as the taxable pay? If its £1900 employee will get the tax relief.

Thanks (0)

Not employer contributions

I think the two responses so far have not addressed the point.

Firstly they are not employer pension contributions they are employee contributions paid by the employer. And Imbru clearly says the contributions should be 5% of salary, which on £2,000 is £100 gross, which then becomes an £80 net deduction.

Imbru - it's a bit of a pickle but I don't think your client will have any problems with HMRC because if there's a tax discrepancy, and I'm not sure you have to look at it that way (see my comments below), it has resulted in an over deduction of tax.

An alternative way to view this muddle is that the employees have paid more into their pension that they intended to. Viewing the situation like this would at least solve the problem of the apparently excess tax relief reclaimed by the pension company. However it would leave the employees having paid more into their pension than was intended.

My suggestion is that the employer discusses the matter with the employees and establishes what each wants to do. The trouble is some will want their money back and others will be happy to leave theirs in the pension fund.

Obviously it would be easier for your client if they all agreed to leave things as they are, but for those who don't your client will be obliged unwind the overpayment of contributions. The added problem with this route is that the pension company might insist that the contributions have been made legitimately and that they cannot now refund them. In this case your client might have to consider a compensation arrangement for those employees affected. 

 

Thanks (0)

Not employer contributions

I think the two responses so far have not addressed the point.

Firstly they are not employer pension contributions they are employee contributions paid by the employer. And Imbru clearly says the contributions should be 5% of salary, which on £2,000 is £100 gross, which then becomes an £80 net deduction.

Imbru - it's a bit of a pickle but I don't think your client will have any problems with HMRC because if there's a tax discrepancy, and I'm not sure you have to look at it that way (see my comments below), it has resulted in an over deduction of tax.

An alternative way to view this muddle is that the employees have paid more into their pension that they intended to. Viewing the situation like this would at least solve the problem of the apparently excess tax relief reclaimed by the pension company. However it would leave the employees having paid more into their pension than was intended.

My suggestion is that the employer discusses the matter with the employees and establishes what each wants to do. The trouble is some will want their money back and others will be happy to leave theirs in the pension fund.

Obviously it would be easier for your client if they all agreed to leave things as they are, but for those who don't your client will be obliged unwind the overpayment of contributions. The added problem with this route is that the pension company might insist that the contributions have been made legitimately and that they cannot now refund them. In this case your client might have to consider a compensation arrangement for those employees affected. 

 

Thanks (0)

You're spot on Tony

Thanks to all comments so far.

The taxable pay is the gross amount of £2,000 (& therein lies the problem)!

Tony has it exactly.   These are employee pension contributions paid over by the employer to the pension provider.   Employees have paid more into their pension than they would have intended and the pension provider has overclaimed tax (on their part, in good faith).

My first thought was the employer had applied PAYE rules improperly & therefore could be assessed as violating PAYE rules, but from Tony's comments, don't think that's the case now.

The mechanics of how the tax is claimed back by HMRC from the pension provider or if HMRC would go after individuals is still a concern. 

Thanks (0)

 

 

Imbru,

As I said in my previous post, I think the tax position is secondary, it will follow from whatever action your client and your client’s employees take.

It's up to the pension company to sort out any adjustment needed to the tax relief they've claimed for each employee. Don’t worry about this.

There are several aspects to your clients pension problem;

·        which employees want their the excess contributions back and

·        which don't;

·        have any of the employees claimed higher rate relief on the "excess" contributions and,

·        if not should they, 

·        what happens to the tax relief claimed by the pension company (see above),

·        what about employees affected who are no longer employed by your client, 

plus one or two more issues I haven't mentioned. 

Your client needs a plan of action and sort it out as soon as possible. I suggest:

 contact the pension company, explain the problem and ask whether they can, and  will refund contributions made in excess of the 5% intended. Bear in mind some employees may be happy to leave the excess payments in their fund. You don't need to worry that these contributions will have generated tax-free income while in the fund. In my experience HMRC are aware of this point in relation to refunded contributions but are content to ignore it.

 

 if the pension company says yes to refunds

produce a memo for all employees briefly and clearly explain what's happened (there's no advantage to covering it up as this would almost certainly create more problems later and leave egg on your client's face when they finally have to admit what went wrong. Ask that all employees indicate what they want to do .i.e. have the money back or leave pension premiums in the fund - spell out the tax ramifications for basic and higher rate taxpayers of each option. Set a time limit for a response. I think two months would be appropriate; say that no response will be taken as agreement to leave the past contributions as they are. Make sure the pension company is aware of the timetable.

 

if the pension company says no to refunds

The position is pretty much as if it says yes - letter to employees etc but they won't be able to offer a refund of contributions. In this case the memo should just advise the employees of what if anything they need to do - It's really only higher rate taxpayers who would be affected, for basic rate tax payers it's no more than informing them of the situation. Assuming your client receives no complaints from their employees that's the end of the matter - but I suspect many will say "I'm out of pocket what are you going to do about it?" - answer - negotiate a settlement.

 

One  solution for your client would be to offer to reduce deductions from their employees future wages for contributions until the previous excess is wiped out. That wouldn't cost them a penny!

Good luck!  

Thanks (1)

Not often you see two people with the same misconception

Excuse my faux pas!  When I said employer contributions, I did mean employee contributions to an employer's scheme.

Such contributions are paid gross and deducted from pay prior to calculation of the employees tax, so that the employee obtains the requisite tax relief by paying tax on a reduced amount of pay.

That's how occupational schemes work and the 5% rate does rather suggest that it is an occupational scheme.

If the employer is contributing to the employee's pension (that doesn't seem to be the case here), I agree that an £80 contribution would be deducted from gross pay.

Thanks (0)

It's a Group Personal Pension not an occupational scheme  - the clue is in the title of the query!

(sorry George not intended to be sarky - just wanted to make position clear for Imbru)

Thanks (0)

Are they really excess?

If I remember rightly, from joining a group pension scheme, my application form specified the fiscal amount not the percentage - the employees would soon have shouted if they had paying more than they expected. These declarations are completed everytime the salary is varied or the employee wants to change his contribution.

I think the reality is that they have paid, and the pension scheme received, the premiums anticipated by the paperwork i.e. a net premium of £100.

That means that from a tax and pension scheme point of view all is correct. If higher rate relief had been claimed it would have been based on the certificate from the pension scheme so no underclaims there except the usual where they didn't know they could.

That only leave the issue that the math was wrong.  This will not invalidate any of the paperwork so no refunds will be possible from the pension scheme. All you can arrange is a premium holiday for the employees, if they wish, until they have withheld the difference between contractual and actual contributions.

Thanks (0)

This isn't a tax problem - just a problem with tax consequences

 

Marion,

I agree that there was never a question over whether the payments were in excess of tax relief limits, but they are in excess of the amount contractually agreed between the employer and employees. So they are undisputedly excessive for that purpose.

The employer does have a problem - forget the tax issue, this will sort itself out along the lines I (and you) suggested, but the employer has screwed up the arrangement with the employees and needs to put it right.

Thanks (0)

Not my point

My point was that the declaration they filled in would have shown the net premium of £100, and they were fully aware of the payment they were making, not that they were over tax limits. As a result there would be no possibility of amending the situation with pension scheme repayments.

Absolutely agree that most people will, as you suggested, leave matters as they are but that it needs addressing anyway.

 

Thanks (0)

just had a similar exercice

with a group personal pension plan - the agreed amount is deducted from the net pay , grossed up by the PP provider and higher rate relief obtained by submission of tax return - in my case it appears that many of the higher rate tax payers are nor reclaiming the tax! In this case i presume that there are no HRT?

Thanks (0)

 

 

Marion,

I cannot be sure but I think you may be assuming too much about what the employees entered on their GPP application. In any event this is irrelevant, the amount is just a starting point for the pension company, premiums can and do vary even under a GPP arrangement. Employees may well have entered £100 net on their application, but from what Imbru says that's probably not the case, his understanding was that the £100 was taken in error. But whatever was shown it doesn't make any difference,  we both agree on the consequences and the solution so Imbru should take something out of that. 

Carmores - your probably right that there are no higher rate taxpayers but neither we nor the employer should assume that - however unlikely one might think it employees might have other income apart from their salary/wages which pushes them into HR.

Thanks (0)

@tony

i certainly wasnt assuming it - thats exactly what i have been doing - sorting  out HR tax relief for clients

Thanks (0)

Thanks to all comments

Constantly amazed at people taking the time to give such meaningful & thought provoking advice & comments.   Don't know how you find the time, many thanks.

Thanks (0)