A scheme pays refresher and reminder

Why scheme pays matters now

Scheme pays lets members pay their annual allowance charge from their pension scheme instead of out of pocket – a useful option for those without liquid cash.

2023/24 was the first tax year members with enhanced or fixed protection (pre-15 March 2023) could contribute again. After years of being frozen out, some may overstep limits as they reacquaint themselves with the rules. Here’s what advisers need to know.

Calculating and reporting the charge

First, calculate the charge by adding excess pension savings to income to determine the tax rate. HMRC’s HS345 provides guidance.

Next, complete a self-assessment tax return and include the charge under ‘Pension Savings Tax Charges’ in the additional information pages.

Mandatory scheme pays

Members can nominate their scheme to share liability if:

• contributions to that scheme exceed the standard annual allowance (£60,000); and
• the charge for the period is over £2,000.

If the member has transferred, the new scheme can take on the charge under the same conditions.

The nomination deadline is 31 July of the year following the tax year (e.g. 31 July 2025 for 2023/24). Missed it? There’s another option.

Voluntary scheme pays

Where mandatory criteria aren’t met, schemes may agree to pay the charge voluntarily. This is at the administrator’s discretion, and liability remains with the member.

Voluntary scheme pays can cover tapered or money purchase annual allowance breaches, with no minimum charge. Administrators will need details of other pension inputs and the amount to pay.

Deadlines follow self-assessment rules: 31 January after the tax year. Payments later may incur HMRC interest.

Accounting for Tax (AFT)

Beware the timing trap. To settle tax on time, requests should be made in Q3 of the calendar year, as schemes must pay by 14 November, the last date before HMRC’s self-assessment deadline.

If missed, ensure the excess is reported in the self-assessment. HMRC hasn’t been issuing late interest penalties where notified, but this could change.

Why timely action matters

The annual allowance charge recoups tax relief on excess contributions, but late payment penalties can add unnecessary cost. Advisers should review client inputs each April and agree who will pay well before deadlines.