An annual allowance for pension savings applies each tax year. The annual allowance is the maximum amount of pension savings an individual can make each year without an annual allowance charge applying. This includes all pension contributions made by the individual, their employer, or a 3rd party. The annual allowance has changed several times since it was introduced and is currently £40,000.
Individuals are subject to a tax charge on the amount of any contribution paid in excess of the annual allowance each year. The tax charge is at the individual's marginal rate of tax. If an individual exceeds the annual allowance, they may be able to carry forward unused annual allowance from previous years. If an annual allowance tax charge is due, they can ask their pension scheme to pay the charge on their behalf with a corresponding reduction in pension benefits. However, the pension scheme is only obliged to facilitate the payment of the charge if certain conditions apply.
The pension scheme has to facilitate the annual allowance tax charge if the following two conditions apply within the timescales:
The annual allowance of £40,000 is the current standard annual allowance.
If these conditions are met and scheme pays is being used, the individual and the scheme becomes jointly and severally liable for the annual allowance tax charge. This means the individual and the scheme are jointly liable for the charge as well as being individually liable for the full amount.
What if the individual's annual allowance is reduced because of tapering or the money purchase annual allowance is triggered?
If the individual has a reduced annual allowance due to the money purchase annual allowance applying or their annual allowance is tapered due to having higher earnings, this does not affect the conditions above. The minimum of £40,000 still applies.
Under a money purchase scheme, the fund is reduced by the amount of the tax charge including any early withdrawal charges which apply.
The individual must notify the scheme they wish to use scheme pays by 31 July in the tax year following the year in which the tax year to which the annual allowance charge relates ended. It's not possible for the individual to tell the scheme before the end of the tax year in which the charge relates to.
For example, if an individual has an annual allowance tax charge for 2019/20 and meets the conditions for scheme pays, they should ensure their request is with the scheme before 31 July 2021.The scheme must then include the liability on an Accounting For Tax return by the quarter ending 31 December 2021 and pay the charge by 14 February 2022.
This deadline will be brought forward if the individual intends to take all of their benefits or will reach age 75 in a year that they want to make use of scheme pays. The individual needs to give the request to pay the charge from the funds to the scheme before taking benefits or reaching age 75 in these circumstances. This will allow the scheme to make any annual allowance charge payments before the benefits come into payment.
The individual should make the request in writing to their pension scheme. This request should be signed and dated.
More detail on the information required in the notice is available on the HMRC website at PTM056420 Annual allowance: tax charge: scheme pays: member notice requirements.
If the conditions do not apply, the pension scheme is not obliged to offer scheme pays. If the individual is due to pay an annual allowance tax charge and scheme pays does not apply, then the individual would pay the tax charge through their self-assessment.
Royal London will apply scheme pays on request when all the conditions above are met.
The last date for requiring a pension scheme to pay an annual allowance charge arising from tax year 2019/20 is 31 July 2021. Employers may want to consider publicising this date so that any employees affected can notify their pension scheme in time.