Scheme pays
Scheme pays is a facility whereby the member can ask the scheme to pay the tax charge out of the scheme funds. If this is from a DC scheme, the amount will just be taken from their pension and paid to HMRC. If it is a DB scheme, some of the accrued pension will be commuted and paid to the scheme. This may reduce the pension now or be applied as a debit at retirement.
There are rules about how much the scheme can be forced to pay, although it can volunteer to pay the whole amount should it wish to be helpful.
Mandatory scheme pays is where the scheme has to honour the member’s request to pay the charge. This is only applicable where the contributions or accrual to the scheme exceed £40,000 and the total tax charge the client is required to pay is more than £2,000. This is a particular issue for those subject to the tapered annual allowance, because it may mean they have to pay the tax charge themselves – or at least the part applicable to the excess over the £10,000 and below the £40,000 bands. Schemes only have to pay the charge for the part over £40,000 that lies with them.
The deadline to request mandatory scheme pays is 31 July following the tax year in which the charge occurs.
Voluntary scheme pays allows the scheme to pay any amount. The member cannot force this to take place, and their deadlines are aligned with self-assessment. The scheme will need time to process the request so it can impose its own deadlines for application.
Don’t forget the tax relief
The annual allowance charge assumes that all tax relief on the contributions has been claimed. If the tax relief isn’t claimed, the annual allowance charge will mean the member is out of pocket.
Higher or additional-rate tax relief should be claimed through self-assessment if applicable. Those that don’t complete a self-assessment and are subject to higher-rate tax can call HMRC with details of their pension contributions, and their tax code will be amended accordingly. HMRC should be notified immediately of any changes to contribution rates in the tax year so extra tax relief isn’t reclaimed which will then need to be paid back.
For those subject to additional-rate tax, their income will be such that they will be subject to self-assessment. As with a higher-rate taxpayer, they can get tax relief sooner by calling HMRC.
Pension contributions can generally be managed to avoid tax charges or having to request refunds. That said, as the annual allowance is just that – an allowance – exceeding it just removes tax relief and is therefore not the end of the world.
