Annual Allowance Charges…who pays?
Every tax year, a taxpayer is entitled to accrue pension contributions in accordance with their annual allowance (AA). The standard AA currently stands at £40,000 per year, however if you are a “high-income taxpayer” (i.e. adjusted income of £240,000 or more p/a, and threshold income exceeding £200,000 p/a), this AA will be restricted by £1 for every £2 in excess of the £240,000 limit, to a minimum AA of £4,000 (2020/21). These allowances apply across all schemes a taxpayer belongs to and includes all contributions i.e. those made by the taxpayer, their employer and any third party who pays on the taxpayer’s behalf.
Where a taxpayer’s contributions exceed the aforementioned AA (whether standard or tapered) they will no longer receive tax relief on the contributions that exceed the limit and they will be subject to a AA charge (provided that there are no prior years’ unused AA to be utilised). Once subject to a AA charge, the taxpayer must complete a self-assessment tax return to detail the extent of their total pension savings which exceed the annual allowance along with the rest of their taxable income to calculate the AA charge.
Paying the AA charge
The taxpayer can of course pay the AA charge themselves. The deadline for doing so is the normal self-assessment deadline i.e. 31 January 2021 for the 2019/20 tax year.
Alternatively, the taxpayer might find it useful to see if they qualify to elect for their pension scheme to pay part or all of the charge on their behalf. This is known as ‘Scheme Pays.’
Scheme pays can be divided into two categories: Mandatory and Voluntary. The qualifying conditions differ according to the category of the scheme, further detail of which has been provided below.
If you wish to use scheme pays, you must tell your pension scheme either electronically or in writing.
Mandatory Scheme Pays
Mandatory Scheme Pays is where the scheme must pay the tax if certain conditions are met. These conditions are:
- Your pension savings with that scheme exceed the standard AA (i.e. £40,000 for 2020/21 – important if you have multiple pension schemes).
- Your AA charge is more than £2,000 for that tax year.
- You notify your pension provider that you have elected for Mandatory Scheme Pays by the deadline and instructed them on how much you want them to pay. The deadline is 31 July following the end of the tax year in which you exceeded your AA, e.g. for the 19/20 tax year the deadline is 31 July 2021
Voluntary Scheme Pays
If you don’t meet the conditions for Mandatory Scheme Pays, you may still apply for your pension scheme to pay the AA charge under the Voluntary Scheme Pays facility.
Voluntary Scheme Pays differs from Mandatory Scheme Pays as it can be used to pay AA charges whether or not the standard AA has been exceeded and you can request that your scheme pays all or part of your AA charge even if the liability is less than £2,000.
That said, it’s important to note that your pension scheme does not have to offer Voluntary Scheme Pays, and even if it does, you remain liable for the payment.
Election for the Voluntary Scheme Pays must be made by the deadline dictated by your particular scheme.
The impact of COVID-19 on Scheme Pays
For NHS pension scheme users, the deadline for electing for Voluntary Scheme Pays for the 2018/19 tax year has been extended from 31 July 2020 to 31 March 2021. This is following an initial extension of the deadline to October 2020 and has been implemented to help support NHS workers who may struggle to pay tax liabilities during this time.
As it currently stands, the deadline has not been extended for Mandatory Scheme Pays for 2018/19, therefore the deadline for making the claim remains at 31 July 2020. That said, the Scottish government has confirmed that those who missed the Mandatory Scheme Pays deadline can instead make a claim under the Voluntary Scheme Pays route. Whether this concession will be extended to those in other parts of the UK is still unclear.