Scheme Pays – your questions answered

If you’re considering whether or not you should ask SPPA to pay your Annual Allowance tax charge through the use of a ‘Scheme Pays’ election, you’ll find the answers to your questions right here.

What is ‘Scheme Pays’?

‘Scheme Pays’ is a mechanism that allows people who have exceeded the HMRC Annual Allowance to get their pension scheme to pay the charge on their behalf instead of paying it through HMRC’s self-assessment system.

Effectively, the scheme pays your tax charge from your fund and reduces your future pension entitlement to cover the cost of the charge.

What are mandatory and voluntary Scheme Pays?

A Scheme Pays is mandatory if the pension growth in your SPPA-administered scheme alone is:

  • more than the Annual Allowance for that tax year
  • your Annual Allowance charge liability exceeds £2,000 and ;
  • you’ve notified the scheme within the statutory timescale.

If all three criteria are in place, you can require the scheme to pay the charge on your behalf.

If your tax charge is due to pension input across more than one scheme or because of a tapered annual allowance, this is known as a voluntary Scheme Pays.

What is an ‘irrevocable Scheme Pays election?

It’s up to you to decide if you want the scheme to pay your tax charge.

However, once you’ve made a Scheme Pays election, your decision cannot be revoked or withdrawn at a later date other than to amend the actual amount paid if your annual allowance charge changes.

When do I have to tell my pension scheme I want to use Scheme Pays?

You must tell your pension scheme by the 31st July in the year following the year to which the Annual Allowance tax charge relates. You’ll have to send your election before the deadline if:

  • You expect to retire – your completed election must be sent to SPPA before your pension is authorised.
  • You reach age 75 – your completed election must be received by SPPA before your 75th birthday.

What happens if I can’t calculate my exact Annual Allowance charge?

If you don’t have the information available to calculate the exact amount of Annual Allowance charge, for the relevant year, you can estimate it. You can then complete a scheme pays election using the estimated figures.

Once you’ve received a final Annual Allowance statement you can amend your tax return within 12 months of submitting the original. You can then send a revised scheme pays election to SPPA.

When will the Scheme Pays amount be recovered?

The amount will be recovered when your benefits are paid at retirement or if you transfer out of your pension scheme.

How will it be recovered?

The Scheme Pays amount will be recovered by reducing your pension and, where appropriate, your lump sum as well.

How much will it cost me?

Your pension is increased by the Consumer Price Index (CPI) to keep it in line with inflation.

A Scheme Pays Debit will be calculated using factors this is then increased by the Consumer Price Index (CPI) to keep it in line with inflation, this debit is then deducted from your pension benefits at the point of award or benefit crystallisation event.

 

What is meant by ‘the relevant date’?

The relevant date is 5 April of the tax year to which the tax charge relates.

What happens if I die?

If you die whilst still a member of your pension scheme, then any recovery due because of Scheme Pays will be written off and your estate will receive the same level of benefits as if you didn't utilise Scheme Pays.

Will it affect my dependents’ benefits?

No, your dependents’ benefits will be based on your pension before any recovery for Scheme Pays.

What happens if I exceed the Annual Allowance again?

The process will be repeated for each occasion Scheme Pays is requested.

Scheme Pays Factors (NHS only)

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NHS Scheme Pays Factors

Further reading

HMRC Pensions Tax Manual – Scheme Pays

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