The Government has published new Regulations which will require pension payers to report certain non-taxable death benefits via Real Time Information (RTI) from 6 April 2022.
There is already an existing requirement to report payments of taxable pension and lump sum death benefits to HM Revenue and Customs (HMRC) using RTI but these new regulations extend this reporting to certain, but not all, non-taxable death benefits.
HMRC originally asked pension payers to start reporting non-taxable death benefits from 6 April 2016 but it was only on a voluntary basis at this time.
Many found they were unable to start reporting at such short notice and those that did found that their returns were incorrectly triggering coding notices to beneficiaries.
As a result, HMRC requested a halt on reporting until the issue was rectified. By October 2018, HMRC finally confirmed their system had been fixed and asked the industry to start reporting again, but this was still on a voluntary basis.
Final Regulations were published in April 2021 after a short technical consultation with industry representatives.
A wider consultation was not considered necessary because the industry have been expecting the regulations for some time. These Regulations will make such reporting mandatory.
The following death benefit payments would be in scope where they are non-taxable:
There are some payments absent from the list of potential death benefits, but this is because they are taxable, and legislation already exists to capture taxable payments.
Importantly, there is an exemption from having to report two of the most common types of non-taxable death benefits payable by occupational pension schemes - defined benefit death benefit lump sums (a lump sum calculated by reference to a defined formula - typically a multiple of salary) and uncrystallised funds death benefit lump sum (a return of fund payment from a money purchase arrangement).
Where such lump sums are taxable then there is already an existing requirement to report the payments.
Capita comment
These regulations have been long expected. The impact of them will vary amongst pension payers depending on what work has been done previously to accommodate the voluntary RTI reporting of non-taxable death benefits.
Interestingly, the Regulations appear to capture non-taxable payments made to bodies (like an estate or a trust) as well as individuals. We do not know why HMRC would require information where the recipient was not an individual, but the legislation appears to have been designed that way intentionally.
It is expected that HMRC will update some of its guidance in due course and that this may clarify some questions that remain outstanding regarding whether reporting is at payroll level or scheme level and whether payments made prior to the regulations being made are to be included. It is our expectation that prior payments would only need to be included if there was a subsequent payment to the same individual and that reporting will be on payroll (rather than scheme level) based on the wording of the final regulations.