The individual concerned notifies, and sometimes will pay, the annual allowance charge through their self-assessment. There may be instances where the member can ask their scheme to pay the charge by reducing their pension benefits - known as ‘scheme pays’. Please note that as stated earlier that even where the scheme pays the charge, the member must declare this through self-assessment.
We answer some common questions where an annual allowance excess applies and the member wants to ask their scheme to pay the tax charge by reducing their pension benefits.
Mandatory scheme pays
Q. My client exceeded the standard annual allowance for 2018/19. Will her scheme have to agree to accept a scheme pays request?
A. There are prescribed conditions which, if met, mean the scheme must* agree to a member’s request to pay up to a maximum amount of the tax charge on the member’s behalf. This is called Mandatory Scheme Pays.
*unless the scheme has been taken over by the PPF, is being assessed by the PPF before the tax charge is paid, or the only benefits held in the scheme are Guaranteed Minimum Pension (GMP) rights which cannot be reduced to meet payment of the tax charge.
The conditions are that;
The member’s annual allowance charge liability for the tax year has exceeded £2,000, and
their pension input amount for the pension scheme for the same tax year has exceeded the standard annual allowance amount (for tax year 2018/19 this means exceeded £40,000), and
The member notice (for details of the content required see here) must be submitted by the deadline specified by legislation. For an AA excess in 2018/19 the deadline will usually be 31 July 2020. It can be brought forward to a date (i) prior to the member becoming entitled to all of their benefits from the pension scheme or (ii) before reaching age 75 (if once they reach age 75 they will have benefits that will be tested against the remaining available Lifetime Allowance at that time).
Where these conditions are not met, the scheme may agree to a request on a voluntary basis.
Voluntary scheme pays
Q. Why don’t all schemes offer voluntary scheme pays?
A. One reason will be due to the deadlines for making the payment to HMRC. If the member intends to pay the charge themselves or their scheme agree to pay on their behalf under a voluntary scheme pays arrangement, the tax charge must be paid within the usual self-assessment deadlines – e.g. for an excess arising in tax year 2018/19 this must be paid by 31 January 2020.
Tapered AA excess
Q. My client exceeded their tapered annual allowance for 2019/20. Do the same conditions, as covered under Mandatory scheme pays above, apply?
A. The conditions are exactly the same but note that mandatory scheme pays only applies where their pension input amount for the pension scheme has exceeded the standard annual allowance amount (i.e. this is not reduced to the tapered annual allowance amount). See example covered later.
Money purchase AA excess
Q. My client exceeded their money purchase annual allowance for 2019/20. Do the same conditions, as covered under Mandatory scheme pays above, apply?
A. The conditions are almost the same. The first condition includes an added restriction that the calculation of the £2,000 tax charge is based on the total input in excess of the standard AA only. And, as before, mandatory scheme pays only applies where their pension input amount for the pension scheme has exceeded the standard annual allowance amount (i.e. this is not reduced to the money purchase annual allowance amount). See example covered later.
Transferred from scheme where AA excess arose
Q. What if the member has transferred out of the scheme where the AA excess arose, can they ask the old or new scheme to pay their charge?
A. For transfers taking place on or after 28 January 2015, providing the member would have met the conditions to submit a mandatory scheme pays notice to the original (transferring) scheme but, before they give that notice all pension benefits are transferred to a new (receiving) scheme, the member can submit a scheme pays notice to the new scheme.
The member’s notice to the new scheme must be given on time - i.e. the same deadline that would have applied for the original pension scheme had the transfer not happened.
Let’s look at an example:
Sam lives in Oxford and is an additional rate taxpayer (who has no available carry forward), with pension inputs of £42,000 into a single pension scheme. If Sam is subject to a tapered annual allowance of £10,000 (as Sam's adjusted income is £300,000) and is an additional rate taxpayer, the tax charge is £32,000 x 45% = £14,400. As this figure is over £2,000, it meets the conditions for ‘mandatory scheme pays’ and the scheme can be forced to pay some of the charge.
If Sam is subject to the money purchase annual allowance, however, the outcome is different. Although her tax charge is £14,400, the rules mean we have to work out the amount of charge based on the pension input amount which exceeds the standard annual allowance of £40,000 (£42,000 - £40,000 = £2,000 x 45% = £900). As the tax charge is less than £2,000, then no ‘mandatory scheme pays’ notice can be raised.
In either case the scheme may agree to pay some, or all, of the tax charge using the voluntary scheme pays payment deadlines.