HMRC shares McCloud remedy tax treatment guidance

HM Revenue & Customs (HMRC) has published draft regulations for proposed changes to the pensions tax framework as part of the public service pension scheme 'McCloud' remedy.

The regulations, which are under consultation until 6 January 2023, make changes to how pensions tax legislation operates in certain circumstances, including changes to how schemes will need to report and pay extra tax charges or reclaim overpaid tax and ensure that schemes can pay pension benefits as authorised payments.

They aim to provide pension scheme administrators with details of the tax changes they will need to consider as a result of the remedy, with pension scheme members to receive further information from their pension scheme "in due course".

The changes are being introduced as part of the government's response following the McCloud ruling, and aim to put members, as far as possible, in the tax position they would have been in had the discrimination not happened.

Although the legislation is intended to take effect from 6 April 2023, some provisions will have a retrospective effect.

Alongside the draft regulations, HMRC has published draft guidance to provide scheme administrators the information they need to deal with the tax changes arising from the remedy.

This confirmed that although the usual deadline for the 2022/23 pension saving statement would be 6 October 2023, this will be extended by a year to 6 October 2024.

The 'rollback' aspect of the remedy will change the pension scheme that affected members of most reformed public service schemes built up their pension in, known as chapter 1 new schemes.

When these members want to retire, their chapter 1 legacy scheme will give them a deferred choice of legacy benefits or new scheme benefits for the remedy period.

The guidance explained that the ‘rollback’ aspect of the remedy will change the opening value for the pension input amount of the affected arrangement for the members and is expected to take place shortly before the 2022 to 2023 pension savings statements would be due.

In light of this, HMRC confirmed that scheme administrators of both chapter 1 legacy schemes and chapter 1 new schemes will have until 6 October 2024 to provide the 2022 to 2023 pension savings statements for members who have part of their pensionable service rolled back into their legacy scheme.

Some areas are not included in the draft guidance, however, including the tax consequences expected to arise for some members around voluntary contributions, ill-health retirement considerations, pension sharing on divorce, and the potential for opted out members to be retrospectively opted back in as part of the remedy.

Guidance on the tax treatment of these issues is expected to be published alongside the draft regulations dealing with them.

HMRC confirmed that it also plans to provide more details on how to claim a repayment or report and pay extra tax due because of changes to a member’s annual allowance (AA) or lifetime allowance (LTA) as a result of the public service pension schemes remedy “in due course”.

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