Share
Scheme pays
We've received lots of 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 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 for the 2022/23 tax year was £40,000, this increased to £60,000 from 6 April 2023.
If the conditions do not apply, the pension scheme is not obliged to offer scheme pays.
What is '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.
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 for the 2022/23 tax year was £40,000 and from the 2023/24 tax year is £60,000.
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.
More questions answered
What if the individual's annual allowance is reduced because of tapering or the money purchase annual allowance (MPAA) is triggered?
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 pension input amount of £40,000 still applies for the 2022/23 tax year and £60,000 from the 2023/24 tax year.
How are the pension benefits reduced?
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.
What is the deadline for applying for 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.
For example, if an individual has an annual allowance tax charge for 2023/24, and meets the conditions for scheme pays, they must ensure their request is with the scheme before 31 July 2025.
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.
How does an individual elect for scheme pays?
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.
What if the scheme pays conditions do not apply?
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.
What about Royal London?
Royal London only offers scheme pays when all the conditions above are met. We do not apply scheme pays on a voluntary basis.
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.