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Jim Grant
Senior Technical Support Consultant

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Scheme pays

Published  04 September 2024
   5 min read

We receive many queries on scheme pays and when it can be used. This article explains how it works and the conditions that apply.

Key facts

There are conditions that apply to mandatory scheme pays:

  • The annual allowance tax charge for the tax year across all pension schemes is greater than £2,000.
  • The pension input amount to the scheme the charge is to be taken from is greater than the annual allowance for the same tax year.
  • The annual allowance is currently £60,000.

If the conditions do not apply, the pension scheme is not obliged to offer mandatory scheme pays.

What is mandatory 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 some or all of 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.

What are the conditions?

The pension scheme must facilitate the annual allowance tax charge if the following two conditions apply within the timescales:

  • The annual allowance tax charge for the tax year across all pension schemes is greater than £2,000.
  • The pension input amount to the scheme the charge is to be taken from is greater than the current standard annual allowance for the same tax year. The standard annual allowance is currently £60,000.

If these conditions are met and mandatory 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.

What is voluntary scheme pays?

This is when an individual doesn’t meet the conditions for mandatory scheme pays but the scheme agrees to pay the individual’s annual allowance charge on a voluntary basis with a corresponding reduction in benefits.

Unlike mandatory scheme pays, the scheme is not jointly and severally liable for the tax charge; the liability would remain with the individual.

Schemes do not need to offer voluntary scheme pays.

More questions answered

Mandatory scheme pays

If the conditions are met for mandatory scheme pays, the scheme must pay the charge and reduce benefits accordingly.

To invoke this form of mandatory scheme pays, the individual 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. The scheme may impose an earlier deadline to give them time to process the request and pay the charge before the payment deadline.

For example, if an individual has an annual allowance tax charge for 2024/25, and meets the conditions for mandatory scheme pays, they must ensure their request is with the scheme before 31 July 2026. The scheme must then pay the charge before 14 February 2027.

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. 

Voluntary scheme pays

If the individual doesn’t meet the conditions, the scheme could (but is not obliged to) apply scheme pays on a voluntary basis.

If the scheme agrees to pay an amount of an individual’s annual allowance charge liability on a voluntary basis, the scheme is not jointly and severally liable for the tax charge and the liability for the annual allowance charge will remain with the individual. The payment made by the scheme on a voluntary basis should therefore be paid to the individual’s normal self-assessment deadline.

So, in the example above the deadline for paying the charge on a voluntary basis is brought forward to 31 January 2025.

For voluntary scheme pays, it is up to the scheme to apply whatever deadline for notification it thinks will give it enough time to process the request and pay the charge before the payment deadline.

HMRC Pensions Tax Manual - PTM056420 Annual allowance: tax charge: scheme pays: deadlines

The individual should make the request in writing to their pension scheme.  This request should be signed and dated.  If the notice is submitted electronically then the individual must confirm that they have personally submitted the notice.

Once an individual has given the pension scheme a notice and it has been received by the scheme, the notice cannot be revoked or withdrawn. It can however be amended at a later date if the amount of the annual allowance charge changes.

More detail on the information required in the notice is available on the HMRC website at HMRC Pensions Tax Manual - PTM056420 Annual allowance: tax charge: scheme pays: member notice requirements.

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.   

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 must be just and reasonable.

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 tax return.

Further information

Annual allowance

An annual allowance for pension savings applies each year, which is based on a pension input period. This limits the amount of tax privileges available on pension savings each year.

Read more  about Annual allowance

Money purchase annual allowance

This article explains what the money purchase annual allowance is, what triggers it and the impact on defined benefit schemes.

Read more  about Money purchase annual allowance

Disclaimer

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.