NICS Pension Schemes - McCloud Judgment Remedy FAQs

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.

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 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.

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, the Westminster Government will be making changes 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.

The Westminster Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

Why should people have 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, 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 – 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, the government will intervene – given the design of the remedy here 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, schemes will take proportionate steps to minimise the administrative burden on members. 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 the government’s mistake?

In practice, most individuals will not have to correct their position, either through the tax system or by claiming compensation.

For those that do, where possible, government and schemes will take proportionate steps 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 will be able to claim a repayment of overpaid tax from HMRC.  

The Act allows them to claim compensation if they are unable to get a repayment through the tax system.

It is acknowledged 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?

The 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

However, as far as the majority of individuals are concerned, they will be provided with a simple choice between two options, and they will have the necessary information available to them when they come to do so.

However, for some, correcting individuals’ pension positions over past years and getting it right, plus getting their tax liability correct, is less straightforward. It is acknowledged 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 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.

 

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, the Westminster Government will be making changes 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. The Westminster Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

When will the tax regulations be ready?

Further tax legislation 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. The Westminster Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

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