Scheme pays conditions apply within the timescales:
The current annual allowance is £40,000.
If the conditions do not apply, the pension scheme is not obliged to offer scheme pays.
If an individual exceeds the annual allowance and an annual allowance 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 has to facilitate the annual allowance tax charge if the following two conditions apply within the timescales:
The annual allowance of £40,000 is the current standard annual allowance.
If these conditions are met and scheme pays is being used, the individual and the scheme becomes jointly and severally liable for the annual allowance 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.
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 conditions above. The minimum of £40,000 still applies.
Under a money purchase scheme, the fund is reduced by the amount of the tax charge including any early withdrawal charges which apply. Under a final salary scheme, the scheme calculates the reduction in benefits. This reduction has to be just and reasonable.
The individual must notify the scheme they wish to use ‘Scheme Pays’ by 31 July in the year following the year in which the tax year to which the annual allowance charge relates ended. 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 2019/20 and meets the conditions for scheme pays, they should ensure their request is with the scheme before 31 July 2021.
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 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 required 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 individual is due to pay an annual allowance tax charge and scheme pays does not apply, then the individual would pay the tax charge through their self assessment.
Royal London only offers scheme pays when all the conditions above are met. We do not apply scheme pays on a voluntary basis.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.