Policy paper

Pension schemes — relief at source amendments

Updated 22 November 2023

Who is likely to be affected

Scheme administrators of registered pension schemes who claim tax relief for their members through relief at source arrangements (RAS).

General description of the measure

The government announced at Autumn Budget and Spending Review 2021 that it would digitise the relief at source pension tax system. This measure makes the necessary updates to the legislative framework to support this digitisation of the RAS system. The measure makes no changes to principles of pensions tax relief, including who is eligible for relief.

The measure will allow HMRC to provide the correct legislative framework for new RAS regulations, include non-compliance with the new RAS regulations as grounds for de-registration and to make provision for different relevant rates in regulations. New regulations will be needed to cover how pension scheme administrators (PSAs) should claim tax relief on eligible contributions made to registered pension schemes from 6 April 2025.

Policy objective

Digitising the administration of RAS pension tax relief will improve the experience for PSAs and reduce errors.

RAS currently operates on a legacy paper-based process. The aims of the digitisation are to deliver modern solutions to supporting the provision of information and declarations, provide faster in-year payments to pension schemes using RAS and to reduce errors.

Background to the measure

Pension contributions made by an active member of a registered pension scheme attract tax relief. The legislation provides for two methods by which relief is given, RAS or through net pay arrangements. Under RAS arrangements, individuals contribute to their pension after the deductions of tax. The PSA then reclaims the basic rate of tax, including where applicable the devolved basic rates of tax, from HMRC. The Registered Pension Schemes (Relief at Source) Regulations 2005 set out conditions and provisions covering how registered pension schemes can claim relief on contributions made to a RAS scheme. For contributions made after 6th April 2025, the new regulations will apply.

Many of the provisions of the current RAS legislative framework, both primary and secondary, will not allow the modernised system to operate as intended. Therefore, when the commitment to digitise Pension Tax Relief, including RAS claims, was made at Autumn Budget and Spending Review 2021, this was accompanied by an acknowledgement that the government would need to legislate in a future Finance Bill. At Spring Budget 2023, it was announced that draft legislation would be published for consultation in summer 2023.

Detailed proposal

Operative date

The changes to Finance Act 2004 will have effect on and after the date of Royal Assent to the Finance Bill 2023-24. The new regulations will have effect for contributions made after 6 April 2025.

Current law

Finance Act 2004: Part 4 covers the operation of tax and pension schemes. Section 157 provides that HMRC may withdraw a scheme’s registration and section 158 sets out the grounds for de-registration.

Chapter 4 deals with tax relief and exemptions in connection with registered pension schemes. Section 192 deals with RAS.

HMRC made the Registered Pension Schemes (Relief at Source) Regulations 2005 (SI 2005/3448) under section 192, and then made key amendments to these in 2018. These regulations cover how PSAs operate a RAS scheme and claim “the relevant rate” of relief from HMRC.

Proposed revisions

The primary changes being consulted on will:

• insert failure to comply with any provision made by regulations under section 192 into section 158 of Finance Act 2004 — this will allow HMRC to withdraw the registration of a pension scheme for non-compliance with any RAS regulations, giving powers that mirror current HMRC practice in other areas.
• define that the default position is that ‘the relevant rate’ means the:
  • Scottish basic rate for Scottish taxpayers
  • Welsh basic rate for Welsh taxpayers
  • basic rate for everyone else
• give power to HMRC to amend the definition of ‘the relevant rate’ by regulations and sets out the procedures that will be followed — as a consequence, sections 192A and 192B (relief at source: additional and excessive relief) will be omitted
• allow HMRC to include in regulations the consequences of failure to comply with information notices made by virtue of those regulations

The amendments made by this revision will have effect on and after 6 April 2025. These changes will not impact on who is eligible for tax relief, nor on the principle of RAS whereby relief at ‘the relevant rate’ can be deducted before the contribution is made.

The secondary legislation being consulted in due course will set out the process by which PSAs can claim relief due to their members under section 192. These regulations will apply to contributions made from 6 April 2025. The existing RAS regulations (SI 2005/3448) will continue to apply to contributions made up to and including 5 April 2025.

The regulations are expected to include:

• that monthly claims must be supported by member level data including sufficient information to verify the identify and eligibility of the members for whom relief is being claimed
• how PSAs should amend their claim for tax relief if needed
• that HMRC will determine and pay ‘the relevant rate’ for each member
• that HMRC will check the eligibility for tax relief and may adjust the relief given where it emerges that the limits of tax relief have been exceeded
• how an overpayment should be repaid and the arrangements for charging interest where it has not been
• the standard 4-year time limit will apply to scheme administrators in respect of claims
• HMRC compliance powers in respect of claims made by schemes and the appeals process against decisions

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
Nil	Nil	Nil	Nil	Nil	Nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

There is no impact on individuals as this measure only affects businesses.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure is operational in nature — it affects how PSAs claim tax relief on behalf of their members. There is no impact on individuals’ eligibility for tax relief nor on the amounts they are entitled to.

The digital system will meet all government accessibility standards. The online system has restricted access to registered PSAs and no members of public need to access it.

Impact on business including civil society organisations

The digital system that this measure supports will have an impact all registered pension schemes that use RAS arrangements. Pension scheme administrators will have to use the online system to claim the tax relief on behalf of their members from April 2025 instead of the current manual process. However, there are no changes to the principles of RAS and who is eligible for relief. There are around 600 active RAS schemes. The impact on businesses will depend on the final design of the online service. This is due to be finalised later this summer and this section will be updated accordingly when the legislation is introduced through a Finance Bill.

The measure provides necessary updates to the legislative framework to support the replacement digital service for the existing manual process for PSAs to claim tax relief. These changes are required to allow the new online service to operate as intended and deliver the benefits for customers (faster payments, removal administrative burdens) and for HMRC (upstream compliance and prevention of over relief).

The one-off costs of moving to the online service will include familiarisation with changes, adapting internal IT systems and updating existing members’ data to ensure it will pass the upfront verification checks. In the long-term, the online service is expected to lead to an overall reduction in the burden and costs on schemes compared to the current process.

Continuing savings will include PSAs no longer having to complete mandatory statistical returns, excess claim returns and a separate Annual Return of Information. In addition, PSAs will not have to collect and retain declarations from members before accepting relievable contributions. As the member level data set that supports the new monthly claim will be the same as that currently collected by schemes for the Annual Return of Information, minus a few fields, this will not increase the burden on schemes. Continuing costs include, for minority schemes who currently do not use the monthly interim claims process, completing a monthly claim if they receive pension contributions.

This measure is expected overall to improve business’ experience of dealing with HMRC as they will be able to claim tax relief due on members’ contributions via the digital service.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

There are no operational impacts as a direct result of implementing this legislative change. The wider digitisation of RAS has already been announced, with a major project in place to implement the IT changes required to support its introduction.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This will be kept under review through communication with PSAs who operate registered RAS pension schemes.

Further advice

If you have any questions about this change, please contact Cath Rourke, Individuals Policy Directorate email: [email protected].