HMRC pension schemes newsletter 165: tax treatment confirmed for payments to bankruptcy trustees and tax-free lump sums paid back into pension schemes

HMRC's latest pension schemes newsletter was published on December 5, 2024, and confirms procedural points regarding payment of lump sums, accessed in anticipation of the Autumn 2024 Budget, and clarifies the tax treatment of pension payments to trustees in bankruptcy.

Previously, (in newsletter 93) HMRC had published information on the tax treatment of payments to trustees in bankruptcy. The article states that once benefits are paid to the trustee in bankruptcy the member may be subject to the money purchase annual allowance on further contributions. However, while HMRC had previously stated that normal income tax rules apply to payments to a trustee in bankruptcy, this has been corrected. Such payments are taxable only at the basic rate, even if the member is a higher rate taxpayer. This is because they should be treated as income received by the trustee in bankruptcy.

Additionally, HMRC has confirmed that where members have accessed pension commencement lump sums or uncrystallised funds pension lump sums (following speculation about possible changes in the Autumn 2024 Budget) the lump sum allowance will not be restored to such members. 

"Cooling off" rules do not apply as the withdrawals are not new products and HMRC states that payment of a tax-free lump sum cannot be undone. The lump sum must be tested against the individual’s lump sum allowance at the time of payment. It is also confirmed that unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met.

The newsletter also confirms that updates to the online pensions tax manual continue in relation to the abolition of the lifetime allowance.