What is scheme pays?

Scheme pays is a process that allows an individual to pay an annual allowance charge from their pension scheme. This means the scheme pays the annual allowance charge direct to HMRC on their behalf, and the tax charge is taken out of their pension fund.

All registered pension schemes must offer a scheme pays facility. However, an individual must meet all of the following conditions to have the right to use scheme pays:

  • the individual’s pension savings – either contributions or benefit accrual – in the pension scheme have exceeded the annual allowance for the relevant tax year.
  • the individual’s annual allowance charge for the relevant tax year – across all savings in registered pension schemes – has exceeded £2,000.
  • the notice for scheme pays is made within the timescale permitted.
  • the individual hasn’t already taken all of their benefits from the scheme.

Pension schemes can allow access to the scheme pays facility where one or more of these conditions haven’t been met – known as the ‘voluntary basis’ – but are not required to do so. The pension scheme must receive the notice no later than 31 July in the next year following the end of the tax year in which the annual allowance charge became due. A member can also pay an annual allowance charge through their self-assessment tax return.

​The scheme pays conditions were not changed when the pensions flexibility rules were introduced from 6 April 2015. So,the above conditions continue to apply where the individual has triggered the money purchase annual allowance.