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HMRC internal manual

Pensions Tax Manual

Annual allowance: tax charge: who pays

Glossary PTM000001
   

 

When an annual allowance charge is due
Who pays the annual allowance charge?
The conditions for ‘Scheme Pays’ to apply
When the scheme administrator will not be liable
How much annual allowance charge will the scheme have to pay
Where a pension scheme pays a member’s annual allowance charge liability on a voluntary basis
Consequential adjustment to the member’s pension benefits

When an annual allowance charge is due

Section 227 Finance Act 2004

The annual allowance charge is a tax charge on the individual.

Normally, it arises where the total pension input amount for an individual in pension input periods which end in the tax year concerned exceeds the amount of the annual allowance for that tax year and any unused annual allowance from the previous 3 years.

Where the total pension input amount exceeds the annual allowance, the annual allowance charge will be levied on the excess.

From 2015-16, individuals who flexibly access a money purchase arrangement will be subject to the money purchase annual allowance in addition to the annual allowance. Depending on their circumstances, it is possible for such individual’s to have an annual allowance charge liability despite their total pension input amount being less than their available annual allowance, for example where their only pension input amount is a ‘money-purchase’ input which has exceeded the £10,000 allowance.

Who pays the annual allowance charge?

Sections 237A and 237B Finance Act 2004

Normally the individual will pay their annual allowance charge liability and account for the payment by completing a Self Assessment tax return. (See PTM056200)

From 11 August 2011 an individual may have the right to elect to require the scheme administrator of their pension scheme to pay some or all of their annual allowance charge liability on their behalf in return for an appropriate reduction in their pension benefits. This is known as ‘Scheme Pays’.

If certain conditions are met, the member will be able to notify their scheme that they require them to pay their annual allowance charge and the scheme administrator will have to:

  • pay to HMRC the amount of tax that the individual has required the scheme to pay and
  • reduce the member’s pension benefits appropriately.

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The conditions for ‘Scheme Pays’ to apply

Sections 237B and 237E Finance Act 2004

An individual can notify their scheme administrator that they require the scheme to pay their annual allowance charge liability only if certain conditions are met. (See PTM056400)

If the conditions are met then the member must give their pension scheme a notice setting out the amount of the annual allowance charge that they require the scheme to pay for them and the tax year to which the charge relates.

Once the scheme has received the notice then they become jointly and severally liable to the annual allowance charge with the member. The scheme must also make an adjustment to the member’s benefits to reflect the amount of the tax that they have paid. However contracted out Guaranteed Minimum Pension benefits and Protected Rights benefits cannot be reduced in order to pay the charge and this may mean that the scheme is unable to pay some or all of it.

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When the scheme administrator will not be liable

Sections 237C and 237D Finance Act 2004

If a member notifies their scheme administrator that they want the scheme to pay their annual allowance charge it may be possible for the scheme administrator to apply for a discharge of their liability to the member’s annual allowance charge. (See PTM056470).

However, a discharge can only be given on certain grounds and if these grounds are not met then the scheme administrator will remain liable for any annual allowance liability that the member has notified to them.

A scheme will not have to pay the annual allowance charge, even if the member satisfies the statutory conditions and has given the scheme administrator notice in the requisite timescale, in the following circumstances:

  • the scheme is being assessed by the Pension Protection Fund at the time the member gives their notice to the scheme or, at the time that an assessment period begins, the scheme has not yet paid the tax following an earlier notice from the member
  • the scheme would be unable to make an adjustment to the member’s benefits to take account of the tax paid because the benefits include contracted out rights. This exception does not apply to rights derived under Section 9(2B) of the Pension Schemes Act 1993
  • the member’s rights have been transferred to another scheme (See PTM056470)
  • the deadline for the member to ask the scheme to pay has passed before the member requests that the scheme pays.

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How much annual allowance charge will the scheme have to pay

Sections 237B (2A), (3) and (4) Finance Act 2004

Money purchase annual allowance does not apply

There is a maximum amount an individual can elect to require their scheme to pay.

If the individual is a member of a single pension scheme then they can require that scheme to pay up to all of their annual allowance liability for the tax year. (This is provided their annual allowance charge liability for the tax year is more than £2,000.)

If the individual is a member of more than one pension scheme then, provided their annual allowance charge liability for the tax year is more than £2,000, they can require any of their schemes in which their pension savings for the tax year are more than the annual allowance (for example, for tax year 2016-17, this means more than £40,000) in that scheme alone to pay part of their liability.

Where the individual is a member of more than one scheme they cannot elect to require just one scheme to pay all of their liability or simply divide the liability equally between all of the schemes that they are a member of. The maximum amount a member can require a scheme to pay is based on the amount of their pension savings that exceeded the annual allowance in that scheme alone.

Money purchase annual allowance applies

From 2015-16 onwards an individual might have an annual allowance charge liability as a result of the application of the money purchase annual allowance.

In effect, application of the money purchase annual allowance means the individual’s annual allowance charge liability is greater when compared with the individual’s annual allowance liability (if any) had the annual allowance applied.

Where an individual’s annual allowance charge liability is by reference to the money purchase annual allowance, the individual cannot elect to require a pension scheme to pay any amount of the individual’s annual allowance charge liability if the individual’s annual allowance charge liability by reference to the annual allowance would have been £2,000 or less.

If the amount of the annual allowance charge by reference to the annual allowance would have exceeded £2,000 the individual can elect to require the scheme pay an amount of the individuals’ tax charge. The maximum amount the individual can require a scheme to pay is based on the amount of their pension savings that exceeded the annual allowance (for example, for tax year 2016-17, this means exceeded £40,000) in that scheme alone and the amount of tax that would have been due by reference to the annual allowance.

For example, if the individual’s annual allowance charge is £4,000 by reference to the money purchase annual allowance and would have been £3,000 by reference to the annual allowance the maximum possible amount that the individual could require the scheme to pay is limited to £3,000.

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Where a pension scheme pays a member’s annual allowance charge liability on a voluntary basis

If a member does not meet the conditions for ‘Scheme Pays’ to apply, their pension scheme may agree to pay their annual allowance charge liability on a voluntary basis. If they do this, the liability for the annual allowance charge will remain with the member until the charge is paid. This means that if, for any reason, the scheme does not pay this within the required time limits, the member will still be liable for the payment of the charge and may incur interest and penalties.

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Consequential adjustment to the member’s pension benefits

Section 237E Finance Act 2004

Where a member meets the conditions for Scheme Pays and notifies their scheme administrator that they require the scheme to pay their annual allowance liability, the member’s pension benefits (or the amount available for the provision of these) will be adjusted by the scheme to reflect the annual allowance charge liability that the scheme has paid on the member’s behalf.

Where a pension scheme pays a member’s annual allowance charge liability on a voluntary basis but does not reduce the member’s benefits in the scheme to take account of the tax the scheme has paid then there could be adverse consequences for the member. In these circumstances the member may also become liable to an unauthorised payment charge on the amount of their liability that the scheme has paid on their behalf.

This will also be the case if the scheme does not make an adjustment to the member’s benefits following receipt of a notice from the member requiring the scheme to pay the member’s annual allowance liability.