How will the McCloud remedy affect my tax position?
Most members will see no changes to their tax position as a result of the remedy or will receive a refund as a result of the remedy.
In the instances where your tax liability does increase, in the vast majority of cases this will reflect an increase in value of your pension benefits received.
Will public sector workers have to pay additional taxes as part of the remedy? If so, how big will their tax bill be?
Most members will see no changes to their tax position as a result of the remedy; if a member has overpaid tax, they will receive a refund for in scope tax years and compensation for out of scope years.
In the instances where a member’s tax liability does increase, in the vast majority of cases this will reflect an increase in value of their pension benefits.
How many individuals will need to pay extra tax?
Given that the remedy relies largely on a member’s choice, which will differ depending on their circumstances, it is not possible to give a meaningful estimate of the number of tax corrections needed as a result of the remedy.
However, the majority of members will see no changes to their tax position or will receive a refund as a result of the remedy.
In the instances where a member’s tax liability does increase, in the vast majority of cases this will reflect an increase in value of their pension benefits.
What changes are being made for tax?
The tax system will in most instances work in the usual way and follow the new pension rights accrued from the remedy taking effect. There are some situations where changes to pension rights due to the McCloud remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022.
Therefore, changes will be made to tax legislation, using provisions contained in the Finance Act that received Royal Assent on 24 February 2022, to ensure that the remedy can be implemented smoothly.
HMRC consulted on the first set of tax regulations from December 2022 to January 2023; these regulations were subsequently made and laid on 6 February 2023. Further tax regulations will be consulted upon, and finalised, ahead of implementation of the remedy.
Why are people being made to pay tax on their legacy pension benefits when they might ultimately choose new scheme benefits?
When individuals are moved back into their legacy schemes, they will be legally entitled to receive legacy benefits for remedy period years – and that needs to be reflected in their tax treatment.
In the majority of cases this is likely to result in a refund of overpaid tax and/or compensation (in the form of increased pension benefits, or a cash sum), rather than additional tax being due. If an active or deferred (someone who is no longer building up entitlement) member then chooses new scheme benefits when they retire, those benefits will be adjusted at that point, and tax applied as appropriate – not with retrospective effect.
Where the choice of new scheme benefits which arrive all at one point means a higher tax bill that year than if the individual had chosen to keep legacy benefits for remedy period years, there will be an intervention – this is because the design of the remedy could trigger a disproportionately high AA charge.
Tax implications of member’s choices will be complex and require specialist support – what plans do schemes have to resource support systems and enable members to make the best choices?
Where possible, proportionate steps will be taken to minimise the administrative burden on members. Although ultimately, decisions made by members will be individual choices.
There will also be further guidance to complement existing HMRC guidance and schemes’ processes which are already in place to help individuals with their tax affairs.
Schemes will also be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e. where receipts or invoices can be provided by a tax adviser or accountant, who helped to resubmit information to HMRC.
Will the remedy require individuals to undertake extensive paperwork to ensure they receive appropriate compensation, even though this is not a mistake of their making?
In practice, most individuals will not have to correct their position, either through the tax system or by claiming compensation.
For those that do, work has been undertaken to remove additional burdens that arise from addressing the discrimination.
Where possible, proportionate steps will be taken to minimise the administrative burden on members, but it will not be possible to completely remove individuals from this process in all cases.
If as a result of the remedy an individual has less tax to pay, they may be able to claim a repayment of overpaid tax from HMRC. If they are unable to get a repayment through the tax system the Act allows them to claim compensation (in the form of increased benefits or a cash lump sum).
It is acknowledged that there is a need to provide clear and accurate information to members going through this process, to enable them to take the required actions. There will be material to support individuals through this process, including guidance and calculators. Schemes will also be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e., a tax adviser or accountant, having to resubmit information to HMRC.
The tax changes are all far too complicated – how can anybody be expected to comply?
This is a unique set of circumstances that is being addressed.
The existing legislation and scheme rules covering public service pensions were not created with a view to making retrospective pension provision. So, the changes made by the PSPJOA 2022 and other legislation are not straightforward but, where individuals are concerned, the complex changes are being made to operate, as far as possible, unobtrusively to assist remedy delivery.
Individuals will have a choice to make, and they will have the necessary information available to them when they come to do so. The majority will be provided with a simple choice between two options.
It is acknowledged that there is a need to provide clear and accurate communication and information to members going through this process. There will also be further guidance to complement the existing HMRC guidance and schemes’ processes which are already in place to help individuals with their tax affairs.
Schemes will be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e., a tax adviser or accountant, having to resubmit information to HMRC as a result of the remedy.
What measures will be in the PSPJOA 2022, Finance Act and Scheme Regulations?
The PSPJOA 2022 contains the core remedy, as well as the bespoke remedy measures for the Judicial Pension Schemes and Local Government Pension Schemes. It sets out what the core remedy will mean for member’s contributions, benefits, pension payments and compensation.
Some elements of the Act concerning contributions, timing of changes to pension rights, and deeming provisions regarding which schemes are making or receiving payments, have been included to ensure proportionate and reasonable tax outcomes, in line with policy set out in the consultation and published response documents.
The tax system will in most instances work in the usual way and follow the new pension rights accrued from the remedy taking effect.
There are some situations where changes to pension rights due to the McCloud remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022. Therefore, changes to tax legislation will be made, using provisions contained in the Finance Act that received Royal Assent on 24 February 2022, to lay tax regulations, which will ensure that the remedy can be implemented smoothly. HMRC consulted on the first set of tax regulations from December 2022 to January 2023 and these regulations were subsequently made and laid on 6 February 2023. Further tax regulations will be consulted upon, and finalised, in the coming months.
When will the tax regulations be ready?
Further tax legislation, in the form of tax regulations, will be required to cover some situations where changes to pension rights due to the McCloud remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022.
This will be delivered using provisions contained in the Finance Act that received Royal Assent on 24 February 2022. HMRC consulted on the first set of tax regulations from December 2022 to January 2023; these regulations were subsequently made and laid on 6 February 2023. Further tax regulations will be consulted upon, and finalised, ahead of implementation of the remedy.
Public Service Pensions Remedy and Spring Budget 2023
The Public Service Pensions Remedy is intended, as far as possible, to put members into the same position that they would have been in had the discrimination not occurred.
The changes to the Lifetime Allowance (LTA) or Annual Allowances (AA) announced at Spring Budget 2023 will not alter this approach. Schemes should continue to implement the remedy as planned.
A first tranche of tax regulations for the remedy were laid on 6 February 2023 and further tax regulations will follow. The timescales for these further tax regulations are not expected to be significantly impacted by the changes to LTA and AA.