The McCloud remedy was meant to close a long chapter for the Armed Forces. The government accepted that moving older members into AFPS 15 was discriminatory, and anyone affected was given the chance to have their service between April 2015 and March 2022 treated under their old scheme, usually AFPS 75 or AFPS 05. For many veterans and reservists that choice produced a payment of arrears, a lump sum top-up and interest.
Then the tax bill arrived.
We are hearing from former officers and reservists facing five-figure tax demands they had no reason to expect. If that’s where you are, the figure on HMRC’s letter is not necessarily the final word. This guide explains why these bills happen, the practical steps to challenge them, and where independent advice can make a difference.
How several years of pension end up taxed as one
Arrears are paid as one sum covering several years of underpaid pension, and they go through PAYE in the month they are paid. As far as the payroll is concerned, you earned years’ worth of pension in a single tax year.
Three things can then happen at once.
You move into a higher tax band. Income that would have sat in the basic or higher rate band in each of the years it relates to can land partly in the higher or additional rate band instead.
You lose some or all of your personal allowance. Once your adjusted net income passes £100,000, your personal allowance reduces by £1 for every £2 over that figure, disappearing completely at £125,140. On income in that band the effective rate of tax is 60%.
The interest is taxed on top. Interest paid on the arrears is generally treated as savings income, taxable in the year you receive it. Your Personal Savings Allowance depends on your tax band: £1,000 for basic rate taxpayers, £500 at higher rate and nothing at all at additional rate. A one-off spike in income can shrink or remove it in the very year the interest is paid.
Underneath all this there may be a separate issue: the annual allowance. Moving your remedy-period service back to the legacy scheme changes how much pension you are treated as having built up in each of those years. That can create, increase, reduce or remove annual allowance charges. These are calculated separately from the tax on your arrears, and it is easy to mistake one for the other when the letters arrive close together.
Step one: identify exactly what HMRC is asking for
Different types of tax demand have different rules and time limits. The letter you have received may be:
- a P800 tax calculation, reconciling the tax you paid through PAYE with what HMRC thinks you owe
- a Simple Assessment (PA302). If you think any of the information is wrong, you must contact HMRC within 60 days
- a Self Assessment calculation, if you file a tax return
- a revised tax code collecting the underpayment from your pension or salary over time
- an annual allowance charge, which relates to pension growth, not pension income
Note any deadline. If the bill appears to combine more than one of these, separate them before you do anything else.
Step two: assemble your evidence
Gather the following before you contact anyone:
- your Remediable Service Statement (RSS) and confirmation of the election you made
- your Remediable Pension Saving Statement (RPSS). Veterans UK issues this to Immediate Choice members after their election, and it shows the figures needed to work out your annual allowance position
- a schedule of your arrears by tax year. The scheme’s own 2015 Pension Remedy Explained booklet confirms this is available from Equiniti, which pays Armed Forces pensions, if you need it for HMRC
- the breakdown of interest paid and any tax deducted from it
- details of any lump sum top-up and whether it was paid tax-free
- your P60s or other income records for each year the arrears relate to
The year-by-year schedule is the single most important document. Without it, HMRC cannot reallocate anything.
Step three: ask HMRC to relate the arrears back to the right years
This is usually where the largest saving lies, and HMRC’s own guidance supports it. The Employment Income Manual (EIM75020) says that where pension arrears are paid in one year, the pensioner should contact HMRC after the end of that tax year with a schedule showing the years the underpayments belong to, and ask for the payments to be related back to those years. HMRC then recalculates each year. The MOD’s 2015 Remedy Tax Booklet points Armed Forces members to the same route.
In practice:
- Wait until the tax year in which you received the arrears has ended on 5 April. HMRC cannot complete the review before then.
- Write to Pay As You Earn and Self Assessment, HM Revenue and Customs, BX9 1AS, quoting your National Insurance number and headed “Pension arrears – public service pensions remedy”.
- Enclose the Equiniti schedule, your income details for each affected year and a short covering letter asking HMRC to relate the arrears back under EIM75020.
- Keep copies of everything and a log of any calls to HMRC’s income tax helpline on 0300 200 3300.
Where the arrears move back into years when your income was lower, the result may be a refund or a lower bill. How much depends entirely on your income in each of those years. The interest is the exception: it stays taxable in the year it was paid.
Check the lump sum while you are at it. If your original lump sum was tax-free, any top-up to it should generally be tax-free as well.
Step four: deal with the annual allowance separately
Reallocating your arrears is done by letter. Annual allowance changes go through a different route: HMRC’s Calculate your public service pension adjustment service, using the figures on your RPSS. The service works out whether you owe more, or are due a refund of charges already paid, and lets you submit the result to HMRC.
Points to know:
- Earlier years are written off. As the Forces Pension Society explains, a new liability can only arise from April 2019 onwards. Any increase for earlier remedy years is not collected.
- Overpaid charges come back. If you paid a charge yourself and it reduces, you can claim a refund. If the scheme paid it through Scheme Pays, your benefits should be adjusted instead.
- New charges can be paid by the scheme. You may be able to ask for a charge to be deducted from your pension instead of paying it in cash.
- Deadlines apply. According to HMRC’s annual allowance guidance, if you were already drawing your pension on 1 October 2023, you have until 31 January 2027 to report charges, 6 July 2027 to elect for the scheme to pay them, and 31 January 2031 to report overpaid tax. Earlier dates apply to members who were not pensioners on that date.
Paying a charge yourself or letting the scheme pay it are not equivalent. Scheme Pays reduces your pension for life, so the right answer depends on your age, health, other income and plans.
Step five: claim compensation for losses that remain
The remedy legislation lets schemes compensate members for certain losses linked to the original discrimination. The Armed Forces scheme’s 2015 Pension Remedy Contingent Decision/Compensation form covers claims for tax losses and direct financial losses, including professional fees where expert advice has been needed.
Supporting evidence is essential: HMRC calculations, correspondence and itemised receipts. The scheme recommends waiting until you have your RSS before claiming. Compensation paid because of the discrimination is not subject to income tax or capital gains tax.
While you wait, keep HMRC informed
Querying a bill does not automatically pause it. If a payment date falls while HMRC is reviewing your position, contact them instead of letting it pass. Late payment interest can build up, and if paying in full now would cause difficulty, HMRC may agree a payment plan.
Where independent financial advice makes a difference
Most people in this position are juggling two or three separate calculations from Veterans UK, Equiniti and HMRC, in language that even professionals find heavy going. Based in Poole, we work with serving personnel, veterans and reservists across the UK, and we know the Armed Forces Pension Schemes in detail. When you bring us a remedy-related tax problem, we can:
- Read your RSS and RPSS with you, so you understand what was paid, which years it belongs to and how it was taxed.
- Build the year-by-year picture HMRC needs to relate the arrears back, working alongside your accountant or tax adviser on the submission.
- Review your annual allowance position for 2019/20 onwards and model whether paying a charge yourself or using Scheme Pays leaves you better off over your lifetime.
- Help prepare a compensation claim with the evidence the scheme asks for. The professional fees you incur may themselves be claimable.
- Plan what to do with the money, once the tax position is settled.
That last point is often overlooked. If you have earnings from a civilian career, a personal pension contribution in the year your income spiked can reduce your adjusted net income and restore some or all of your personal allowance. Tax relief is limited to 100% of your earnings, and pension income does not count as earnings, so this works only where you are still employed or self-employed. It also has to be weighed against how HMRC finally reallocates the arrears, which is why it needs looking at before the tax year ends.
Beyond that are the questions anyone receiving a lump sum should ask: how much to keep in cash, whether to use your ISA allowances, how this fits with your Armed Forces pension, any Early Departure Payments and your State Pension, and what it means for your estate. You can read more about how we support the Forces community on our Armed Forces advice page, and our fees are set out clearly before any work begins.
We understand the financial challenges of service life, and the remedy has added another one. Call us on 01202 622223 or get in touch online for a no-obligation first conversation.
Useful contacts
- HMRC income tax helpline: 0300 200 3300. Post: Pay As You Earn and Self Assessment, HM Revenue and Customs, BX9 1AS
- Armed Forces pension enquiries (JPAC): 0800 085 3600, via Veterans UK
- Forces Pension Society: forcespensionsociety.org, an independent not-for-profit that publishes regular remedy updates
- HMRC remedy service: Calculate your public service pension adjustment
Frequently asked questions
Why have I been taxed so heavily on my McCloud remedy arrears?
Arrears covering several years are taxed through PAYE in the year they are paid. That can push you into a higher tax band and, above £100,000 of adjusted net income, reduce your personal allowance. HMRC’s guidance allows arrears to be related back to the years they belong to once the tax year has ended.
Is the interest on my remedy arrears taxable?
Yes. It is generally treated as savings income, taxable in the year it is paid, and your Personal Savings Allowance depends on your tax band that year. Unlike the arrears, the interest is not related back to earlier years.
Could I also face an annual allowance charge?
Possibly. The remedy recalculates your pension growth for each remedy year. Any new liability can only arise from April 2019 onwards, and it is reported through HMRC’s Calculate your public service pension adjustment service using the figures on your RPSS.
Can I claim back the cost of professional advice?
The Armed Forces scheme’s compensation arrangements can cover direct financial losses, including professional fees where expert advice was needed. Claims need evidence such as itemised receipts and are assessed by the scheme.
Do you advise reservists as well as regular personnel?
Yes. Reservists, including those who served on Full Time Reserve Service, can be within scope of the remedy, and we regularly advise reservists on their service pensions alongside their civilian finances.
Talk to us
An unexpected tax bill is unsettling, especially when it follows a payment that was meant to put things right. You don’t have to work through it alone. Call us on 01202 622223, email info@apexcb.com or book a complimentary initial consultation. There’s no commitment and no jargon.
This article is for general information only and does not constitute personal financial, tax or legal advice. Tax treatment depends on your individual circumstances and may change in the future. Any refund or reduction depends on HMRC’s assessment of your circumstances. Apex CB Financial Planning Ltd provides independent financial advice and works alongside accountants and tax advisers where specialist tax advice is required.
The value of investments, and any income from them, can fall as well as rise, and you may get back less than you invest. Your capital is at risk.
The Financial Conduct Authority does not regulate tax advice.
Apex CB Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. FCA number 507964. Registered address: Suite 2 Jellicoe House, Admiralty Park, Station Road, Holton Heath, Poole, BH16 6HX.