Pension redress payments are usually tax-free. This means you won’t have to pay any Income Tax or National Insurance on them. Pension redress payments are usually made to people who have lost out on pension benefits due to maladministration by the pension scheme provider. The payment is intended to compensate you for the loss suffered. It’s not considered income so it’s not taxable. Check with HM Revenue & Customs if you’re unsure if your pension redress payment is taxable.
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Types of Pension Redress Payments
Pension redress payments are lump-sum payments made to individuals who have been adversely affected by certain past pension schemes or practices. These payments may be taxable depending on their type.
- Compensation Payments: These payments are made to people who lost money due to mismanagement or maladministration of their pension schemes. These payments are not taxable.
- Discretionary Payments: These payments are made to people who have suffered a loss that is not related to mismanagement or maladministration. These payments are taxable.
- Interest Payments: These payments are made on the redress payment and are usually taxable.
Taxation of Pension Redress Payments
| Type of Payment | Taxable? |
|---|---|
| Compensation Payments | No |
| Discretionary Payments | Yes |
| Interest Payments | Yes |
If you receive a pension redress payment, it’s important to consult with a tax professional to determine your specific tax liability.
Taxation of Lump Sum Pension Redress Payments
Payments under a pension scheme that are attributable to periods before 2008 will not be subject to income tax. It is deemed non-assessable non- Excelentexempt income. The tax treatment of lump sum pension payments made in respect of periods after 2007 is set out below:
- Payments to superannuation funds and certain approved deposit funds: The taxable portion for a specific percentage of lump sum superannuation payments over the tax-free threshold is shown in the table below. The tax-free threshold for the 2022-23 income year is $275,000.
- Payments to a bank account or other non-approved funds: Tax is paid on the entire amount.
Year of Payment Taxable Portion for Payments Over the Tax-Free Threshold 2007-08 60% 2008-09 to 2010-11 57% 2011-12 to 2012-13 54% 2013-14 to 2014-15 51% 2015-16 to 2016-17 48% 2017-18 to 2018-19 45% 2019-20 to 2022-23 35% 2023-24 30% Taxation of Periodic Pension Redress Payments
If you receive periodic pension redress payments, they will be taxed as ordinary income. This means that you will need to pay income tax on the payments, and they will be subject to Medicare and Social Security taxes.
There are two main types of periodic pension redress payments: back payments and future payments. Back payments are payments for benefits that you were owed in the past, while future payments are payments for benefits that you will receive in the future.
Back payments are taxed as ordinary income in the year that you receive them. Future payments are taxed as ordinary income in the year that they are earned.
Here is a table that summarizes the taxation of periodic pension redress payments:
Type of payment Tax treatment Back payments Taxed as ordinary income in the year that you receive them Future payments Taxed as ordinary income in the year that they are earned If you have any questions about the taxation of periodic pension redress payments, you should consult with a tax professional.
Thanks for sticking with me through this pension redress payments tax guide. I hope it’s helped you understand the ins and outs of the tax implications. If you have any more questions, feel free to give us a shout. And don’t forget to swing by again soon for more money-related wisdom. We’re always here to help you make the most of your hard-earned cash. Peace out!