HMRC clarifies tax treatment of GMP arrears

It explained where pension arrears are paid in connection with GMP equalisation, interest is paid at 1 per cent above the base rate, which qualifies as a scheme administration member payment, and so as an authorised payment.

Interest payments made in addition to arrears will be charged on the full amount arising in the tax year, while in the context of pension arrears, the interest is taxable in the year in which it is paid.

HMRC explained that there are circumstances where the person paying interest is required to deduct tax at source, and that this depends on whether the interest is “yearly” or “short”, there being no obligation to deduct tax at source on the latter.

“Where the arrears relate to a period of years (as is likely to be the case where pension arrears are paid in connection with equalising for the effect of unequal GMPs), the interest paid is likely to qualify as yearly interest,” it said.

Where yearly interest on pension arrears is paid by individual or corporate trustees, or a third-party administrator on the trustee’s behalf, there is still no obligation to deduct tax at source unless the member being paid usually lives outside the UK. By contrast, when the entity paying is a company, there may be an obligation to deduct tax at source regardless of where the recipient lives.

HMRC continued, setting out that from the recipient’s perspective, interest on arrears qualifies as “savings income”, which has a number of allowances that allow for the earning of interest before tax has to be paid, such as personal allowance, the starting rate for savings and the personal savings allowance.

Tax may therefore not be due on all interest, but where it is due the recipient is expected to “include the interest in a self-assessment tax return or notify HMRC of the liability if they do not receive a notice to make a return”.