Annual allowance: tax charge: scheme pays: general
Sections 237A-237E Finance Act 2004
The Registered Pension Schemes (Notice of Joint Liability for the Annual Allowance Charge) Regulations 2011 - SI 2011/1793
Where a member has an annual allowance charge and certain conditions are met, they can give their scheme administrator notice that they want the pension scheme to pay some or all of their annual allowance charge liability on their behalf to HMRC in return for an appropriate reduction in their pension benefits. If the conditions are met then the scheme administrator becomes jointly and severally liable (with the member) for the annual allowance charge and must pay this to HMRC within a given timescale. They must also make a consequential adjustment to the member’s pension savings or their benefits under the pension scheme.
There are some circumstances under which the scheme administrator does not have to pay the member’s annual allowance charge and if these do not apply, it may also be possible for the scheme administrator to apply to HMRC for a discharge of their liability. (See PTM056470)
Conditions for ‘Scheme Pays’ to apply
An individual can elect to notify their scheme administrator that they require the scheme to pay some or all of their annual allowance charge liability in return for an appropriate reduction in their pension benefits in the scheme if the following conditions are met:
- their annual allowance charge liability for the tax year has exceeded £2,000 and
- their pension input amount for the pension scheme for the same tax year has exceeded the annual allowance amount in section 228 Finance Act 2004 (for example, for tax year 2016-17, this means exceeded £40,000 - i.e. the tapered annual allowance and/or money purchase annual allowance is ignored).
Note - for annual allowance purposes only, tax year 2015-16 is split into two ‘mini’ tax years; the pre-alignment tax year (6 April 2015 to 8 July 2015) and the post-alignment tax year (9 July 2015 to 5 April 2016). For tax year 2015-16, the condition in the bullet immediately above is met if the individual’s pension input amount for the pre and post-alignment tax years for the pension scheme exceeded £40,000.
Where an individual’s annual allowance charge liability is by reference to the money purchase annual allowance, the individual cannot elect to notify the scheme administrator unless the individual’s annual allowance charge liability by reference to the annual allowance would have exceeded £2,000.
If the conditions are met then once a member has notified their scheme administrator that they want the scheme to pay all or part of their annual allowance charge, the scheme administrator will become jointly and severally liable to the annual allowance charge together with the member. (See PTM056460 for further information)
There is a maximum amount that a member can ask their scheme administrator to pay under these circumstances based on the pension input amount in the scheme which exceeds the annual allowance. There is no minimum amount that the member can ask their scheme administrator to pay but if this is less than £2,000 then they will need to confirm to their scheme that their annual allowance liability for the year is more than £2,000.
The member does not have to ask their scheme administrator to pay the maximum amount that they are allowed to ask it to pay. They can ask the scheme to pay part of the amount and then the member would pay the difference direct to HMRC.
Where the conditions for ‘Scheme Pays’ do not apply
Where a member does not meet the conditions for ‘Scheme Pays’ to apply or they do not make their nomination in time then a scheme may decide to pay the member’s annual allowance charge on a voluntary basis.
Unlike with ‘Scheme Pays’ the scheme would not then have joint and several liability for the tax charge so the liability would remain with the member. The payment made by the scheme on a voluntary basis should therefore be paid to the member’s normal Self Assessment deadline. Where the scheme does not reduce the member’s benefits in the scheme to take account of the tax the scheme has paid, then the member may also become liable to an unauthorised payments charge on the amount of their liability that the scheme has paid on their behalf.