Rectification Payments and Higher Rate Tax Liability

I hope this information may benefit annuitants of the Equitable Life Society who have had their policies rectified and obtained a substantial sum in back payment.

In some circumstances this may cause them to pay higher rate tax for which they would not otherwise have been liable.

This additional tax can be claimed back from the Society but only if it is demanded.

Personal Case History

In my case, the payment from Equitable Life was made with tax deducted at the standard rate. However, when I completed my annual tax return I was assessed for higher rate tax as my year’s income put me into this bracket. I contacted Inland Revenue on the telephone to be informed that that is how it is and that there was nothing to be done about it but pay the tax assessed.

This year there was a reference in the very useful ‘Question of Money’ column in the Sunday Times on the back-payment of pensions in a single year. It was stated that the tax liability would be spread over the years in which this had accrued. When I contacted her, the editor provided me with full reference to the regulation.

I therefore wrote to Inland Revenue, quoting the article and requesting refund of the higher rate taxation accordingly. In a letter dated 16 September 2005, I was informed that the tax had been correctly charged in the year of receipt “as the payment related to an annuity and not an occupational pension.”

The letter went on to say: “However you will see from correspondence issued to you, probably around the time payment was made, that under the terms of the rectification scheme if payment of the lump sum resulted in you being liable to a higher rate of tax than would have applied had the additional annuity lump sum payment not been made, then an application can be made to Equitable Life who will refund the higher rate liability. This has been agreed between the Revenue and Equitable Life provided the requirements set out below are met:

1)      Confirmation that you had paid tax at higher rate as a result of the payment of the lump sum. This would include any higher rate liability because of the loss of any age-related allowances.

2)      Revenue Documentation demonstrating that the lump sum pushed your income into higher rate tax that you would not have paid had the sum not been paid in [the year]”

I looked into my records carefully, but could find no sign of such information being given to me. I copied the letter with proof of tax paid to the Equitable Life Society and received a refund to the higher rate tax as calculated by them.

In response to my enquiry concerning information about this refund arrangement, in a letter dated 14 December 2005, the Society wrote:

"We confirm that we did not previously inform you that subject to a successful application, the Society would refund the higher rate marginal tax liability ......If a policyholder contacts us and informs us that the interest on the lump sum payment has resulted in them becoming subject to a higher rate of tax, we write back and confirm the agreement we have with the Inland Revenue."

Summary

If the consequences of a back-payment of an annuity following the rectification procedure results in you paying a higher rate of tax than you would have otherwise done, then this additional payment may be claimed back from the Equitable Life Society.

But the key points are that:

1)      The Society does not supply this information automatically. It follows that you must write to the Society to obtain the necessary details that you need to make a claim.

2)      You will not receive this tax refund from the Society unless you ask for it.

3)      The re-payment of this tax is not made by the Inland Revenue.