If, in any Pension Input Period ("PIP"), your contributions to all pension arrangements exceed the Annual Allowance you may be subject to an Annual Allowance tax charge. The PIP is from 6 April to the following 5 April.
If your Annual Allowance tax charge exceeds £2,000, you have the option to ask the Scheme to arrange payment of the ‘AA’ tax charge on your behalf from your scheme benefits. This is known as ‘Scheme Pays’.
The Annual Allowance tax charge will be paid by the Scheme in return for a reduction in your pension benefits – see Reduction in Benefits below.
The maximum amount you can request the Scheme to pay is based on the amount of your pension input amount that exceeds the Annual Allowance (this will be shown on your AA benefit statement which can be accessed in the Secure Member Area). If you have benefits in any other arrangements that are subject to an Annual Allowance tax charge these cannot be taken from the Scheme.
Your election for 'Scheme Pays' does not have to be the total amount that you are required to pay. You can make an election requiring the Scheme to pay some of the Annual Allowance tax charge and you would then pay the difference direct to HMRC; or you could pay all of your liability direct to HMRC. If you decide to pay all your liability direct to HMRC you do not have to tell the Scheme.
You will need to notify HM Revenue & Customs (HMRC) if your pension input amount exceeds the ‘AA’ (taking account of any unused amounts carried forward from the three previous ‘PIPs’) as you will be liable to pay an AA tax charge.
You should include your pension input amount and ‘AA’ tax liability on your Self Assessment tax return. If you submit paper returns, you will need to ask for the additional information pages (SA101).
The ‘AA’ tax charge is not calculated using a fixed rate but will depend on how much taxable income you have and the amount that your total pension input amount exceeds the ‘AA’.
To find out how much you will pay, you will need to work out the rate or rates of tax that would be charged if your excess pension input amount was added to your taxable income. More information about this can be found on HMRC’s guidance notes - http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM06108100.htm.
The amount of ‘AA’ tax charge will be included in your tax calculation. You would normally have to pay the charge in the usual Self Assessment payment deadlines. However, you may get the choice of exercising ‘Scheme Pays’.
If you elect ’Scheme Pays’, the amount of your pension benefits that you would have expected to get from the Scheme will be reduced by an amount that corresponds with the amount of tax that has been paid as follows:
The amount of tax paid by the Scheme on your behalf will be converted into an equivalent amount of pension. The pension benefit you expected to get from the Scheme would then be reduced by the pension equivalent of the amount of tax paid on your behalf. For example, a member’s promised pension of £30,000 per annum might be reduced to £29,000 per annum as a result of the scheme paying an annual allowance charge for the member. In addition the member’s contingent liabilities e.g. a spouse’s pension will also be reduced as a consequence of reducing the member’s benefits.
The Scheme will decide what level of adjustment will be made to a member’s/contingent liabilities pension benefits taking into account normal actuarial practice.
You must notify HMRC of your intention to use ‘Scheme Pays’ for the relevant ‘PIP’ by 31 January and make an irrevocable election to the Scheme before 31 July. Both of these deadlines are in the year following the relevant ‘PIP’. An election cannot be revoked although it can be amended.
The Scheme will not charge an administration fee if you elect ‘Scheme Pays’.
If you accrue an Annual Allowance tax charge of over £2,000 within the ‘PIP’ in which you retire, you can elect for “Scheme Pays” in respect of this charge. To do this, you must notify the Scheme before you retire as the ‘AA’ tax charge will need to be taken from your retirement benefits.