If an individual exceeds the annual allowance (AA) and an AA tax charge is due, they can ask their pension scheme to pay the charge on their behalf with a corresponding reduction in benefits. The pension scheme is only obliged to facilitate the payment of the charge if certain conditions apply.
The pension scheme would have to facilitate the AA tax charge if the following two conditions apply within the timescales:
The AA of £40,000 is the standard AA for 2017/18.
If these conditions are met and scheme pays is being used, the individual and the scheme will become jointly and severally liable for the AA tax charge. This means the individual and the scheme are jointly liable for the charge as well as being individually liable for the full amount.
Under a money purchase scheme, the fund will be reduced by the amount of the tax charge including any early withdrawal charges which apply. Under a final salary scheme, the scheme will calculate the reduction in benefits. This reduction would have to be just and reasonable.
The pension scheme must receive the request to pay the charge from the funds 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 in which the charge relates to.
For example, if an individual has an AA tax charge for 2017/18 and meets the conditions for scheme pays, they should ensure their request is with the scheme before 31 July 2019.
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 would 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 AA tax charge payments before the benefits come into payment.
The individual should make the request in writing to their pension scheme. This request should be signed and dated.
More detail on the information which should be included in the notice is available on the HMRC website at PTM056420 Annual allowance: tax charge: scheme pays: member notice requirements.
If the conditions do not apply, the pension scheme is not obliged to offer scheme pays. If the member is due to pay an AA tax charge and scheme pays does not apply, then the individual would pay the tax charge through their self assessment.
Royal London will only offer scheme pays when the conditions above are met. We do not apply scheme pays on a voluntary basis.
Senior Product Insight and Technical Support Analyst
Fiona has worked in financial services since leaving university in 1998 and has experience of working in technical support and product design as well as working as a financial planner. She’s a Chartered Financial Planner and a Fellow of the Personal Finance Society.