Scheme Pays – The Annual Allowance Charge

Contents

Introduction

If a member contributes in excess of the annual allowance, (currently £60,000 per tax year), the excess can’t be refunded but there may be an opportunity to request the Annual Allowance charge to be settled from funds within the pension scheme.

If certain conditions are met, a member can give their scheme administrator notice that they want the pension scheme to pay some or all of their annual allowance charge liability on their behalf to HMRC in return for an appropriate reduction in their pension benefits. 

If the conditions are met, then the scheme administrator becomes jointly and severally liable (with the member) for the annual allowance charge and must pay this to HMRC within a given timescale. 

Conditions that apply for scheme pays

As mentioned, a member can elect to notify their scheme administrator that they require the scheme to pay some or all of their annual allowance charge liability in return for an appropriate reduction in their pension benefits in the scheme if both the following conditions are met:

• their 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 annual allowance. 

If the individual has a reduced annual allowance due to the MPAA applying or their annual allowance is tapered due to having higher earnings, this does not affect the above conditions.

Please note that if the member has multiple schemes, they can only elect one scheme to settle the tax charge.

The information required on the notice:

As mentioned, the member alone must provide written notice to apply for scheme pays and the letter of instruction must include:

• the members title and full name;
• address (including postcode, if applicable);
• National Insurance number (or, if they do not have one, the reasons why they do not qualify for a National Insurance number);
• the tax year to which the annual allowance charge liability relates;
• the amount of the annual allowance charge liability that the member wants the scheme to pay on their behalf for that year; and
• confirmation that the amount of the liability they want the scheme to pay has been calculated at the proper rate.

They must also confirm in the notice that they understand that:

• they cannot withdraw the notice; and
• their benefit rights in the pension scheme will have to be adjusted to take account of the tax that will be paid on their behalf by the scheme.

Notification Deadline:

The member must notify the scheme they wish to use ‘scheme pays’ by 31 July in the year following the tax year to which the annual allowance charge relates. It's not possible for the individual to tell the scheme before the end of the tax year in which the charge relates to.

For example, if an individual has an annual allowance tax charge for 2024/25, and meets the conditions for scheme pays, they must ensure their request is with the scheme before 31 July 2026.

This 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 needs to give the request to pay the charge from the funds to the scheme before taking benefits or reaching age 75 in these circumstances.

This will allow the scheme to make any annual allowance tax charge payments before the benefits come into payment.

Please note the above may alter once the new post 6 April 2024 rules have been fully digested.

What if scheme pays does not apply?

Where a member does not meet the conditions for ‘Scheme Pays’ to apply or they do not make their nomination in time then a scheme may decide to pay the member’s annual allowance charge on a voluntary basis. However, the scheme is under no obligation to do so.

If the conditions do not apply, the pension scheme is not obliged to offer scheme pays. If the individual is due to pay an annual allowance tax charge and scheme pays does not apply, then 

SS&C Hubwise do not offer the voluntary pays model, as such where the conditions are not met the individual would pay the annual allowance tax charge through their self-assessment tax return.