We help you consider all areas and put together a financial plan that helps you to achieve your financial goals
Looking for Financial Advice?
Book a no obligation call with one of our experts
We work in partnership with all parties to ensure clear processes are in place for communicating this topic with members. The information provided here gives a brief and general overview of Scheme Pays and it does not cover every aspect due to the complexity of the topic.
If an individual exceeds the annual allowance (AA) and an AA tax charge is due, they can ask their pension scheme to pay all or part of the charge on their behalf with a corresponding reduction in benefits. The pension scheme is only obliged to pay the charge if certain conditions apply.
The pension scheme must pay the AA tax charge where a member asks within the timescales and the following two conditions apply:
The AA for 2016/17 is £40,000. If these conditions are met and Scheme Pays is being used, the individual and the scheme will become jointly and severally liable for that AA tax charge or the scheme’s share of it if there is more than one scheme giving rise to the charge.. If the conditions are not met the member can still request that the scheme should pay and the scheme can do so but the scheme is not obliged to comply with that request.
If the individual is subject to tapering due to having higher earnings or the MPAA applies, this does not affect the conditions above. The minimum of £40,000 in the scheme still applies for the scheme to be required to pay, even if the tax charge is greater than £2,000.
Under a money purchase scheme, the member’s fund will be reduced by the amount of the tax charge. Under a final salary scheme, the scheme will calculate an equivalent reduction in benefits. This reduction would have to be fair and reasonable having regard to normal actuarial practice. The Trustees should obtain (if not already sought) advice on an appropriate basis for adjusting benefits. Two general options are:
While the scheme has the power to impose its own chosen method, if they wish the Trustees are free to agree, individually, a mutually acceptable method with each affected member.
The pension scheme must receive the request to pay the charge no later than 31 July in the year following the tax year in which the AA tax charge was incurred. It's not possible for the member to tell the scheme before the end of the tax year to which the charge relates. For example, if an individual has an AA tax charge for 2016/17 and meets the conditions for Scheme Pays, they should ensure their request is with the scheme before 31 July 2018 if their tax remains unpaid.
Note however that the AA excess amount should be entered in the “Pensions Savings Tax Charges” section of the Self Assessment tax return along with the tax paid or payable by their scheme(s) and that tax return should be made by 31 January. HMRC do however accept on-line amendment to submitted Self Assessment returns up to twelve months after their original deadline or in writing after that period.
The Scheme Pays deadline will be brought forward if the individual intends to take all of their benefits or will reach age 75 in a year that they want to make use of Scheme Pays. The individual would give the request to the scheme before taking benefits or reaching age 75 in these circumstances. This will allow the scheme to make any AA tax charge adjustments before the benefits come into payment.
The individual should make the request in writing to their pension scheme. This request should confirm some specific information and be signed and dated. More detail on the information which should be included in the request is available on the HMRC Pensions Tax Manual at PTM056420 Annual allowance: tax charge: scheme pays: member notice requirements.
If the scheme pays the tax charge, this needs to be included in the Scheme’s Accounting For Tax (AFT) return. The AFT return is a quarterly return and ordinarily the scheme administrator only needs to complete an AFT return if one or more of the tax charges that the scheme administrator is responsible for paying has arisen in a quarter. Once reported the tax charge payment can be made.