Offsetting unauthorised payments for Chapter 1 members
Source: gov.uk (2025-11-11)

Find out if you can offset tax charges for Chapter 1 members who received top-up lump sums in the public services pensions remedy (known as McCloud).

Who qualifies for offsetting

Offsetting new unauthorised payment charges is possible for Chapter 1 members (https://www.gov.uk/guidance/chapter-1-pension-scheme-guidance) if:
- they are due a lump sum top-up due to the remedy
- they had an earlier unauthorised payment charge
- their original lump sum was paid after 5 April 2019
- the scheme used the mandating procedure (https://www.gov.uk/guidance/pension-schemes-and-unauthorised-payments#paying-tax-due-on-unauthorised-member-payments) to pay the original charge
This can apply to:
- members with legacy scheme benefits under rollback or immediate choice
- protected, taper-protected, or immediate choice members who chose 2015 scheme benefits
- members who retired on or after 1 October 2023 and later chose 2015 scheme benefits
- any other immediate choice members whose benefits changed due to the McCloud remedy
When offsetting applies

If a member originally received a pension commencement lump sum and it has increased due to the remedy, they can receive a top-up payment.

The top-up due to the member may incur an unauthorised payments tax charge and scheme sanction charge.

The resulting top-up payment will be subject to interest due to the member, as per HM Treasury directions.

If the original lump sum included an unauthorised payment and the member has an increase in their pension rights, increasing their pension commencement lump sum, this may reduce the original:
- unauthorised payments charge
- scheme sanction charge
Where the original unauthorised payments charge has reduced and a refund is due, that refund can be used against the top-up unauthorised payments charge. The same applies to the scheme sanction charge.

Interest on the top-up is still an unauthorised payment but must be reported separately as the scheme sanction charge does not apply to it.

Offsetting repayment interest

The member is entitled to repayment interest (https://www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates#current-late-payment-and-repayment-interest-rates) on the refunded unauthorised payment charge and scheme sanction charge. Repayment interest can be used in the offsetting of new charges.

Repayment interest is calculated to start from the later of the:
- tax payment due date (31 January after the end of the relevant tax year) for the original charge
- date on which the tax was paid
The period of repayment interest ends on the date the top-up payment is made to the member.

What the scheme administrator needs to do

You must calculate the:
- revised unauthorised payments charge on the original lump sum paid
- amount of overpaid unauthorised payments charge on the original lump sum
- repayment interest on the overpaid unauthorised payments charge
- new unauthorised payments tax charge on the top-up amount and interest at 40%
You can offset the original overpaid charge and repayment interest against the new charge. The scheme administrator and member are jointly and severally liable to the charge. This means you do not need to use the mandating procedure. You only use the mandating procedure when the scheme administrator is not liable to the tax charge.

The same offsetting rules apply to the scheme sanction charge, but the interest, as provided for in HM Treasury directions, is not applied.

If no new unauthorised payment and scheme sanction charge applies, the scheme can still claim a refund of the overpaid tax.

What to report when using offsetting

When you use the offsetting process, you must send details to us. You must not amend previously submitted or submit new event reports. You must provide the:
- Pension Scheme Tax Reference
- scheme name
- scheme administrator name
- scheme administrator ID
- scheme practitioner ID (if a practitioner submits for an administrator)
- member’s name and National Insurance number
If the member does not qualify for a National Insurance number, you should provide us with their date of birth and address. They will get another identifying number to use instead of a National Insurance number.

If the offsetting results in a credit, include the scheme’s bank details for repayment.

Unauthorised payments charge and offsetting details

You must include details of the original unauthorised payments charge, including the:
- original amount of the total unauthorised payment
- date of the original unauthorised payment
- tax year of the event report that included the unauthorised payment
- amount of the unauthorised payments charge paid to us
- date the charge was paid
- charge reference (leave blank if unknown)
We may ask for more details, depending on how this charge was reported.

You need to include details of the revised unauthorised payments charge. This includes the:
- total revised value of the unauthorised payment after the remedy changes are added
- the revised unauthorised payments charge, which is 40% of the revised amount
You must report details of the top-up unauthorised payments charge. The details include the nature of the top-up payment and date paid to the member. They include the total value of the top-up (before tax), including the HM Treasury direction interest.

You must report the unauthorised payments charge on the top-up, and the interest calculated at 40% on that charge.

You must include these offsetting details:
- the excess individual amount — the overpaid tax calculated on the original unauthorised payments charge minus the revised unauthorised payments charge
- amount of excess individual amount being offset against the top-up unauthorised payments charge
- repayment interest (https://www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates#current-late-payment-and-repayment-interest-rates) on the excess individual amount
- any repayment interest left after offsetting
- any refund being claimed after offsetting
- the date of the return when the top-up was reported, but offsetting was not applied
- the reason offsetting was not used before
- the top-up payment individual calculation result — the liability or credit resulting from offsetting
- the amount paid to the member after deducting tax
Scheme sanction charge and offsetting details

You must report details of the original scheme sanction charge, including the:
- original unauthorised payment amount subject to scheme sanction charge (based on amounts built up after 5 April 2006)
- original scheme sanction charge paid to us
- date it was paid
- HMRC charge reference
You must report the revised scheme sanction charge. This includes the total revised value of the unauthorised payment (after remedy changes) subject to the scheme sanction charges (based on amounts built up after 5 April 2006).

You must include the top-up scheme sanction charge, including the:
- amount of top-up subject to scheme sanction charge
- scheme sanction charge on the top-up
- excess scheme amount — the overpaid tax calculated on the original scheme sanction charge minus the revised scheme sanction charge
- repayment interest (https://www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates#current-late-payment-and-repayment-interest-rates) on the overpaid scheme sanction charge
- any repayment interest left after offsetting
- any refund being claimed
- top-up payment scheme administrator calculation result — the liability or credit resulting from offsetting
How to report offsetting to HMRC

You must report all changes made through offsetting.

Do not amend previously submitted event reports. Fill in our spreadsheet and send it through the Secure Data Exchange Service.

If you need the spreadsheet, contact your HMRC representative or email xxx@xxx.xx (mailto:xxx@xxx.xx).

Use the subject line ‘Offsetting Unauthorised Payments Charges: Spreadsheet’.

You must report quarterly based on when the top-up unauthorised payment was made:
- 1 January to 31 March — report by 15 May
- 1 April to 30 June — report by 14 August
- 1 July to 30 September — report by 14 November
- 1 October to 31 December — report by 14 February
If no top-up payment was made, you have until 31 January 2031 to reclaim overpaid charges.

What happens next

We will review your submission. If there’s still overpaid tax after offsetting, we’ll refund the scheme.

If the offsetting results in a higher charge, we’ll raise a new unauthorised payments charge and scheme sanction charge.