These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.09 January 2020 Back to results
Normally, an individual will need to pay an annual allowance charge if their pension savings in a tax year exceed the annual allowance limit that applies to them, and they don’t have sufficient unused allowance to carry forward from the previous three tax years. An annual allowance tax charge will apply to any excess.
For more information on the ‘standard’ annual allowance, please refer to our separate Annual Allowance FAQs and for information on when the annual allowance is reduced for higher earnings, please refer to our Tapered Annual Allowance FAQs.
It’s possible for someone to have an annual allowance charge liability for a tax year despite their total pension savings being less than their available annual allowance. For example, this could happen where the MPAA applies to an individual, they have made pension savings into a money purchase arrangement and these exceed the MPAA limit for the tax year.
So, someone could incur an annual allowance charge through exceeding their annual allowance (plus any carry forward amounts), the MPAA or exceeding both.
For more information on the money purchase annual allowance (MPAA) refer to our Money Purchase Annual Allowance FAQs.
An annual allowance charge is a tax charge on the individual regardless of who was responsible for the excess pension savings (such as contributions by an employer).
What rate of tax is applied to the annual allowance charge?(Expand content) (Minimise content) (Content loading)
If an annual allowance tax charge is due it’s payable at a person’s marginal tax rate taking into account their taxable income and the amount of their excess pension savings.
The marginal rate(s) of tax chargeable that applies will depend on where the individual is classed as living in the UK.
Scottish taxpayers (with an S rate identifier at the start of their tax code) would be subject to an annual allowance tax charge based on Scottish income tax rates and tax bands. Similarly, Welsh tax payers (with a C rate identifier at the start of their tax code) would be subject to an annual allowance tax charge based on Welsh income tax rates and tax bands.
For the rest of the UK, the charge could, in whole or in part, be at 45%, 40% or 20%.
The charge is usually paid through the individual’s Self-Assessment tax return. However, provided certain conditions have been met, an individual can elect for their pension scheme to pay part or all of the charge on their behalf from their pension savings. This is known as ‘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 savings. There are certain conditions that need to be met for an individual to have the right to use this facility.
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 on a mandatory basis:
- the individual’s pension savings – either contributions or benefit accrual – in the pension scheme have exceeded the ‘standard’ annual allowance for the relevant tax year (the MPAA and tapered annual allowance are ignored for these purposes).
- the individual’s total 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.
Where an individual has pension savings across multiple pension schemes, the maximum amount of charge any scheme can be required to pay is based on the amount by which the individual’s savings in that particular scheme have exceeded the standard annual allowance. There is no minimum amount of charge that a member can ask their scheme to pay but if the amount of charge the individual wants their scheme to pay is less than £2,000 then they would need to confirm to the scheme that their total annual allowance charge is more than £2,000.
Where the MPAA or tapered annual allowance applies, the maximum amount of charge a scheme can be required to pay is still based on the amount by which the individual’s savings in that particular scheme exceed the ‘standard’ annual allowance. This means that even if all of the conditions listed above have been met, an individual who has a reduced annual allowance can’t require their scheme to pay the full amount of their annual allowance charge. A pension scheme may agree to pay the balance on a voluntary basis but is not obliged to do so.
Example – Philip has adjusted income of £450,000. Therefore, his annual allowance is reduced by the taper to the minimum of £10,000. Philip’s employer pays contributions totalling £45,000 in the tax year to his personal pension. This amount exceeds his annual allowance by £35,000. If Philip has no unused annual allowance to carry forward, there will be an annual allowance charge due on the excess, £35,000 x 45% = £15,750 (assuming the rest of UK income tax rates apply). However, Philip can only require his pension scheme to pay the tax charge that arises on the £5,000 excess above the ‘standard’ annual allowance (£5,000 x 45% = £2,250). This means that Philip may have to pay the £13,500 balance from his other resources, unless his pension scheme agrees to pay this part of the tax charge on a voluntary basis.
Do providers have to allow access to scheme pays on a voluntary basis?(Expand content) (Minimise content) (Content loading)
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.
Any payment made by a scheme on a voluntary basis should be paid to the member’s normal Self-Assessment tax return deadline. The reason for this is that where a scheme has agreed to pay part or all of an annual allowance charge on a voluntary basis, the liability for the voluntary element of the tax charge remains with the member. This means that any request to use scheme pays on a voluntary basis must normally be submitted much earlier than when the statutory conditions have been met.
When does a scheme not have to offer scheme pays?(Expand content) (Minimise content) (Content loading)
A scheme is not obliged to offer scheme pays where:
- it’s being assessed by the Pension Protection Fund at the time the member makes a scheme pays request.
- a scheme pays request has been made but before tax is paid to HMRC the scheme starts to get assessed by the Pension Protection Fund.
- a pension scheme would be unable to make an adjustment to the member’s benefits in the scheme to take account of the tax paid because the benefits to be adjusted include ‘contracted-out’ rights.
- the MPAA or tapered annual allowance has been exceeded but the standard annual allowance hasn’t.
A scheme may also apply to HMRC for a discharge of their liability to pay a charge if doing so would substantially harm the interests of other members of the scheme or where it would not be reasonable for the scheme to pay a charge (for example, where the value of a member’s benefits is not enough to meet the charge).
Who should calculate the tax charge for scheme pays?(Expand content) (Minimise content) (Content loading)
This is the responsibility of the member (with help from their adviser, if they have one). The member should simply tell their scheme or provider how much of the charge they want the scheme to pay. This can be done using a ‘scheme pays notice’.
Is there a standard form for making a scheme pays request?(Expand content) (Minimise content) (Content loading)
There is no industry standard form, but any notice requesting scheme pays must be made in writing or electronically. The notice must contain certain information and declarations. Most schemes and providers have produced suitable forms that their members can use for this purpose.
What is the deadline for submitting a scheme pays notice?(Expand content) (Minimise content) (Content loading)
For a pension scheme to become jointly and severally liable to an annual allowance charge, it must receive a notice no later than 31 July in the year following the tax year in which the annual allowance charge relates.
For example, if an annual allowance charge relates to the 2019/20 tax year, then the deadline for submitting a scheme pays notice to a pension scheme would be 31 July 2021. Once a pension scheme has received a notice for scheme pays, and the necessary conditions have been met, it can’t be withdrawn. However, the amount of charge that an individual has asked their pension scheme to pay can be amended later by submitting a revised notice.
The deadline stated above can be brought forward in the following circumstances:
If a member intends to take all of their benefits from a pension scheme or if a member will reach age 75 and there will be a BCE at that age*, and a member wants a scheme to pay an annual allowance charge for that tax year or another tax year, then they have to give a scheme pays notice to the scheme administrator before the date on which they either intend to take all their benefits or before the BCE at age 75.
*A BCE will take place at age 75 if there are uncrystallised benefits or if there are drawdown funds held that were set-up after 5 April 2006.
Where an individual intends to use scheme pays but there is a transfer of all of their benefits from one scheme to another before they submit a scheme pays notice, they can submit the notice to the receiving scheme. If all of the statutory conditions for scheme pays were met in relation to the transferring scheme, the receiving scheme must comply with the notice. In other words, it does not become a voluntary scheme pays request for the receiving scheme.
What are the implications for a member's benefits?(Expand content) (Minimise content) (Content loading)
Where a pension scheme pays part or all of an individual’s tax charge, there must be a corresponding reduction in their benefits, otherwise the member may become liable to an unauthorised payments charge. Under a money purchase arrangement, the member’s fund is reduced by the amount of the charge (including any early withdrawal charges, if any). For defined benefits arrangements, there is flexibility as to how a scheme reduces a member’s accrued benefits, but any adjustment must be ‘just and reasonable’. Dependants’ pensions, other death benefits or contracted-out rights such as guaranteed minimum pensions can’t be reduced to pay an annual allowance charge.
HMRC’s scheme pays guidance can be found at:
Pensions Technical Services