Pension Scheme Pays reporting: information and notice deadlines
Updated 27 October 2021
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Who is likely to be affected
Individuals who have retrospective increases in UK tax relieved pension contributions or entitlement that is greater than the annual allowance in a tax year.
Pension scheme administrators of registered pension schemes with members who have retrospective increases in UK tax relieved pension contributions or entitlement greater than the annual allowance in a tax year.
General description of the measure
This measure extends the reporting and payment deadlines where an individual asks their pension scheme to settle their annual allowance charge of £2,000 or more from a previous tax year by reducing their future pension benefits, in a process known as ‘Scheme Pays’.
Policy objective
To support the government’s objective of a system of pensions tax relief that is fair, affordable and sustainable, by modifying existing legislation so more individuals will benefit from the Scheme Pays facility.
Background to the measure
The annual allowance was introduced to limit the amount of UK tax relieved pension saving an individual can benefit from in a tax year. Initially set at £215,000, it increased to £255,000 for 2010 to 2011. The annual allowance was reduced to £40,000 for tax year 2014 to 2015 onwards.
This reduction was accompanied by the introduction of carry forward and Scheme Pays; both help an individual to meet larger annual allowance charge liabilities in the current tax year that might arise due to the reduction. Scheme Pays is where, in certain circumstances, the individual has elected for the pension scheme administrator to be jointly liable for the annual allowance charge of at least £2,000 in relation to that scheme, in return for an actuarial equivalent reduction in the value of their pension pot.
The response to the Public service pension schemes consultation: changes to the transitional arrangements to the 2015 schemes, set out how the government is seeking to address the age discrimination identified as a result of these changes, including how increases in pension entitlement in past years will be treated for tax purposes.
At Tax Day the government announced its intention to make technical updates to pension tax rules to remove anomalies that were identified as part of finalising the remedy for the age discrimination found in the 2015 public service pension reforms.
This measure will apply to all individuals within scope of a retrospective annual allowance tax charge of £2,000 or more, who meet the conditions to qualify to use Scheme Pays and not just those individuals affected by the age discrimination found in the 2015 public service pension reforms.
Detailed proposal
Operative date
This measure will have effect from 6 April 2022 but will be retrospective from 6 April 2016.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 (A-day) and are set out in Part 4 of the Finance Act (FA) 2004.
Although there are no limits to how much an individual can save or accrue in a registered pension scheme, there is an overall limit on the amount of an individual’s tax-relieved annual pension savings or accrual (including employer contributions). This is known as the annual allowance (sections 227 to 238A of FA 2004). The standard annual allowance is currently £40,000. The tapered annual allowance reduces pensions tax relief for higher earners by reducing the standard annual allowance by £1 for every £2 of income over the adjusted income limit of £312,000 (section 228ZA(4)). Individuals with incomes in excess of the threshold income of £240,000 (section 228ZA(5)) are affected, with a maximum reduction down to £4,000 for those with an income of £312,000 and above. Unused annual allowance from the three previous tax years for the individual can be carried forward and added to the annual allowance. If the individual’s pension savings for the tax year (pension input amount) exceed this total, the annual allowance tax charge is applied to the excess. The annual allowance charge is linked to the individual’s marginal rate of tax. The tax charge is not a penalty; it effectively recoups the excess tax relief that the individual has already received.
The liability for an annual allowance charge normally rests with the individual, but FA 2011 provided for the individual to elect for the pension scheme administrator to be jointly liable for the tax charge. This is known as mandatory Scheme Pays. Where an individual has an annual allowance charge in excess of £2,000 and their pension input amounts for that scheme exceed £40,000, they can ask their pension scheme to pay the charge for them, in return for an actuarial equivalent reduction in the value of their pension pot (section 237E).
In some cases, the pension scheme may choose to pay the annual allowance charge for a member when asked, even if they don’t have to. This is referred to as voluntary Scheme Pays.
Where the individual has an annual allowance charge, they must report it on their Self-Assessment return and, where appropriate, that they want the scheme to pay the charge. The individual must tell the scheme by 31 July in the year following the end of the tax year.
The scheme administrator must report the annual allowance charge to HM Revenue and Customs (HMRC) in their Accounting for Tax return (AFT) for quarter ended 31 December following the end of the tax year. The AFT must be delivered to HMRC within 45 days of that quarter ending, so 14 February.
Proposed revisions
This measure focuses on changes to the Scheme Pays process that apply when an individual asks their pension scheme to pay an annual allowance charge in relation to an earlier tax year, and when the pension scheme administrator must report and pay that annual allowance charge to HMRC.
This measure will require the scheme to pay the charge if it arises because of a retrospective change of facts, the charge is £2000 or more, and an individual asks the scheme to pay it within the new deadlines.
This measure will extend the deadline for when the scheme administrator must report and pay the annual allowance charge, so that the deadline for paying the charge relates to when the scheme administrator is notified of the charge, rather than a fixed period after the end of the tax year.
Summary of impacts
Exchequer impact (£million)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| – | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
This measure is expected to impact individuals by extending the reporting and payment deadlines where they ask their pension scheme to settle their annual allowance charge from a previous tax year, by reducing their future pension benefits, in a process known as Scheme Pays.
Customer experience is expected to remain broadly the same as it does not alter how individuals interact with HMRC.
There is not expected to be an impact on family formation, stability or breakdown.
Equalities impacts
The nature of the change means that those affected may be in higher income groups so they may be less likely to be from ethnic minority groups, women or the disabled. As the changes affect pension entitlement that has been built up previously, those affected are less likely to be young.
No other impacts are anticipated in respect of groups sharing other protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on pension scheme administrators of registered pension schemes with members who have increases in the pension input amounts greater than the annual allowance in a previous tax-year.
One-off costs will include familiarisation with the changes.
Continuing costs could include the need for pension scheme administrators to deal with more Scheme Pays requests and the recalculation of some previous Scheme Pays cases.
Customer experience is expected to stay broadly the same as it does not significantly alter how pension scheme administrators interact with HMRC.
This measure is not expected to impact civil society organisations.
Operational impact (£million) (HMRC or other)
There will be minimal changes needed to online guidance on GOV.UK.
Pension schemes already report and pay the annual allowance charge to HMRC on the AFT where an individual has asked to use the Scheme Pays facility. This measure does not change this, so there will be no other operational impacts.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Karen Bishop on Telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.