As a result of the tapered annual allowance, more and more people are subject to an annual allowance charge, which can prove a significant sum of money.
For those who don’t meet the mandatory scheme pays rules, they may well have to find these funds themselves or use, if available, the voluntary scheme pays option.
Care needs to be taken to understand how these systems work, and the implications they will have on retirement benefits. Below is an outline of the complexities involved.
Mandatory scheme pays
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 two 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 – currently £40,000.
If these conditions are met, then a member is able to notify their scheme administrator that they want the scheme to pay all or part of their annual allowance charge. At that point, the administrator will become jointly and severally liable to the annual allowance charge together with the member.
The maximum amount a member can ask their scheme administrator to pay under mandatory scheme pays is based on the pension input amount under the scheme that exceeds the annual allowance. There is no minimum amount that the member can ask their administrator to pay. But if the amount is less than £2,000, 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. They can ask the scheme to pay part of the amount they are allowed to ask it to pay, and then the member would pay the difference direct to HM Revenue & Customs.
It is still possible to request that mandatory scheme pays is applied, even if the scheme has transferred in the interim. The ceding scheme won’t be able to pay the charge because it won’t hold any of the client’s assets, but the requirement to pay can be passed on to the new scheme administrator.
Voluntary scheme pays
Voluntary scheme pays is just as it says. If mandatory scheme pays doesn’t apply, or doesn’t cover the whole payment due to the money purchase annual allowance or tapered annual allowance, the scheme can pay the charge on a voluntary basis. This type of scheme pays doesn’t make the scheme jointly liable for the payment: it is still the responsibility of the member to ensure it is paid.
This method was originally most common in money purchase schemes where the deduction of the charge is usually the simplest and has the least impact on the administrator. However, it has become more widely available in recent years from defined benefit pension schemes, too.
For those that are using voluntary scheme pays, it is worth noting the deadline for HMRC to receive the funds is the same that applies for self-assessment: January 31 following the tax year in which the charge arose.
