The CMS have been getting pension contributions wrong for years. Are you due a refund?
We wrote recently on pensions but a recent disclosure of information from the Department of Work and Pensions has revealed a very worrying lack of basic education in those who draft the Child Maintenance policy.
This error has potentially impacted anyone who has made a pension contribution and had it counted in their maintenance calculation leading to a higher liability than would be required by legislation.
It’s also worrying as we would have thought that the CMS would have access to people who understand pensions given that they are part of the Department for Work and PENSIONS.
How “should” the CMS treat pension contributions?
The document they have released relates to the way that pension contributions are treated by the child maintenance service.
If you make a pension contribution you are entitled to tax relief at your marginal rate of tax (this is because you will eventually be taxed on the income from the pension when you draw it down).
20% Basic Rate*
40% Higher Rate*
45% Additional Rate*
You can see the current income tax rates in the UK here: https://www.gov.uk/income-tax-rates
*These are correct as at November 2017.
The amount taken off your gross income for child maintenance purposes is the amount of the pension contribution PLUS any tax paid on the contribution.
What guidance do the CMS give their caseworkers on pension contributions?
The information disclosure showed 2 documents relating to Pension Contributions:
Decision Making Guidance from 10th December 2012 – 28th September 2017
and their “updated” version
Decision Making Guidance from 29th September 2017
We will post a link to the documents at the end of the article but bear with us as you may have grounds for a refund of your maintenance or a complaint.
The content of the documents is essentially the same so it’s not clear to us yet what they have updated. However, it’s when we look at the worked examples that we see some very simple errors that anyone with even a simple understanding of maths would be able to pick up.
We are going to assume that since it took a member of the public to raise this issue that the CMS are unaware of it and continue to be since they have repeated the error in their “new” document.
An error in basic arithmetic
Here is the guidance that CMS caseworkers follow when they are informed that a person has made a pension contribution:
Non-resident parent was a basic rate taxpayer during the relevant tax year
The gross amount of their pension contributions will be:
£ Amount of contributions x 100 / 80 (this reflects the current basic income tax rate of 20%).
Non-resident parent was a higher / additional rate tax payer
Note: The following section will only apply if the evidence relates to a completed tax year. If the evidence of contributions relates to the current tax year, the non-resident parent will not yet have been able to claim additional relief from HMRC.
Tax relief is only given by the pension provider at the basic rate of income tax.
The remainder must be claimed by the taxpayer from HMRC.
The ‘grossed up’ amount of the pension contributions that should be deducted from the non-resident parent’s income will be the total of:
£ Amount of contributions x 100 / 80 (this reflects the current basic income tax rate of 20%); and
£ Amount of additional tax relief allowed by HMRC.
OK, so that seems simple enough. They will gross back the tax paid before taking it off the non resident parent’s income.
They then give a worked example for a non resident parent who was a higher or additional rate taxpayer:
Non-resident parent is required to support one qualifying child.
HMRC confirm an income figure of £60,000 for the tax year 2010 – 2011.
The non-resident parent claims they paid £3000 to their personal pension scheme during that tax year. The non-resident parent submits an annual statement from their pension provider, confirming they received £3000 in payments from the non-resident parent and that they have added £750 in income tax relief at the basic rate of 20%.
As the nonresident parent is a higher rate tax payer they receive additional relief of £750 for the balance of tax relief at the higher income tax rate (i.e. 40% higher income tax rate – 20% basic income tax rate already covered by the pension provider).
The total amount to be deducted for pension contributions from the non-resident parent’s will therefore be: £3000 (amount of contributions) + £750 (basic rate income tax relief) + £750 (balance of higher rate income tax relief) = £4500.
The income figure to be used in the Maintenance Calculation will therefore be £60,000 – £4500 = £55,500. This figure will be converted into a weekly amount of: £55,500 x 7 / 365 = £1064.38. (Editor Note: This is not how you should work out the weekly amounts)
Have you spotted the error yet?
As the CMS seem unable to produce guidance for their caseworkers to derive the correct calculation for maintenance we will outline how the above example should have worked
HMRC confirm gross income figure of £60,000 (meaning they have paid 40% tax on their earnings above £45,001 and for all of the £3,000 used in this example).
The Non Resident Parent pays £3,000 into their pension
The government (or pension provider) would actually add back £750
As the non resident parent is a higher rate tax payer they receive additional relief of £1,250
The simple calculation is £3000 x (100/60)
This makes their total gross contribution £5,000 (not £4,500).
This makes sense as the total tax paid is 40% on the marginal pounds used to pay into the pension.
The Gross income figure for maintenance then becomes £60,000 – £5,000 = £55,000 (£1,057.69 per week).
Worryingly, this is a manual process after which the “income” is entered into the child maintenance system to produce their calculation. Nonsense in equals nonsense out.
The above example may not seem significant to you. However, people have right (and an expectation) that the calculation and the maths is done correctly. This is especially true where the CMS has the power to deduct money from bank accounts, freeze funds, remove driving licences etc.
We will continue to highlight errors where we find them and keep watching for some really revealing stuff we have in the pipeline with respect to the CMS and those who run it.
It is not good enough!
Are you due a refund?
We think that the DWP should be held accountable for its errors. If you discover that you have paid too much due to an issue caused by the CMS then you should complain and demand compensation.
Beware though that this is what the DWP say about refunds due to overpayments:
In regard to the reviewing of historic calculations, each request for a reimbursement is considered on an individual case basis.
It is not an automatic right for a non-resident parent to receive a reimbursement. This is considered on an exceptional basis.
Section 41B (2) Child Support Act 1991 allows the Secretary of State to make such reimbursement as he considers appropriate. This means that a reimbursement can be considered upon some, all or none of the overpayment.
Considering a reimbursement Reimbursement decisions are discretionary decisions. This means CMG has the authority to make a judgment upon what is the most appropriate action to take. This must take into account the following:
the particular circumstances of the case. Being fully aware of the circumstances of the case and clients before deciding on the most appropriate course of action
the case must be fully reviewed
all previous decisions with regards to the suspension and adjustment of debt, or where a previous decision is obviously wrong, must be checked to ensure they are correct
where necessary the case must be brought up to date and the amount of the overpayment confirmed before proceeding
any other relevant guidance which relates to the specific decision being made, such as the debt steer etc. A discretionary decision to approve or a reject a reimbursement must be recorded in case notes.
Make sure you ask for all of the above and we would recommend involving your MP and sending copies of the letter to David Gauke MP and Caroline Dinenage MP who are the 2 Senior Ministers responsible for the CMS and its numerous failings.
Also published on Medium.