Annual allowance charges - know your options

The number of people receiving an annual allowance tax charge continues to rise. HMRC’s private pension statistics for the 2021/22 tax year show more than 50,000 people reported exceeding their annual allowance, with the total of excess contributions reaching a whopping £1.2 billion. This is a significant increase on the previous year, a difference which HMRC attributes at least in part to adjustments to the tapered annual allowance trigger points which it believes may have led to an increase in the use of ‘scheme pays’ to pay the tax charge.

This year the annual allowance rose to £60,000, which was good news for savers, this being the first increase since 6 April 2014. Perhaps with a higher limit we may finally see the number of people exceeding their allowance start to fall. For now, you may have clients who exceeded their allowance last tax year and want to understand their options for paying the charge.

What are the options?

Many people who find themselves with an annual allowance tax charge will pay it directly to HMRC through their self-assessment tax return. ‘Scheme pays’ instead allows your clients to settle the tax charge by having it paid from their pension scheme. This can be a convenient option for those who don’t want to or are unable to pay the charge personally, but there are some important points to be aware of.

Where certain conditions are met, the scheme administrator is compelled to pay the tax charge using funds from your client’s pension. This is sometimes referred to as compulsory scheme pays. Compulsory scheme pays can be used where:

• The total tax charge is more than £2,000, and
• The total contributions made to the scheme asked to pay the charge exceed the standard annual allowance, £40,000 for the 2022/23 tax year.

In those cases that don’t meet these conditions, clients can still ask the scheme to pay the charge on a voluntary basis. This may be useful where your client has a small charge or if they only exceeded the money purchase annual allowance or tapered annual allowance.

Importantly, voluntary scheme pays can also be used to pay a charge where contributions exceeding the allowance were made to a different scheme. This is particularly useful for those clients who exceed their allowance in a defined benefits scheme but choose to ask a money purchase scheme to pay the charge instead, so preserving valuable defined benefits.

However, not all pension schemes may agree to voluntary scheme pays.

Are there any deadlines?

Those who qualify for compulsory scheme pays have until 31 July in the following year to make an election. That means your clients have until 31 July 2024 to notify their scheme they want them to pay a charge for the 2022/23 tax year.

This deadline is brought forward in the year your client turns 75 or accesses all of their pension, so notice must be given before either event takes place.

The deadline can also be extended to up to six years after the tax year the charge relates, or three months after a revised pension savings statement is issued, where the charge arose due to a retrospective amendment of the client’s pension input. This is particularly relevant for those impacted by the McCloud remedy, but it applies to all schemes.

There isn’t a fixed deadline for voluntary scheme pays, but if payment isn’t made by your client’s self-assessment deadline HMRC may impose late payment penalties. Unlike compulsory scheme pays, this means that where voluntary scheme pays is used, charges relating to the 2022/23 tax year need to be paid by 31 January 2024 to prevent a penalty.

This is a shorter deadline than it first seems. Schemes pay the tax charge via the quarterly Accounting for Tax (AFT) return, so to ensure the deadline is met schemes needed to be notified by 30 September 2023.

If your client has missed this deadline, don’t panic. As long as the scheme is notified by 31 December this year they can include the charge in their next AFT return, which has a payment date of 14 February. This would mean that your client would only have 14 days of potential late payment penalties, assuming HMRC chose to pursue this. Your client could also pay the charge personally instead of using scheme pays to ensure the self-assessment deadline isn’t missed.

How can you elect for scheme pays?

Once your client has decided they want to use scheme pays, whether compulsory or voluntary, they need to notify their scheme. The scheme will likely have a standard form your client can complete for this.

Your client will also need to include details of the charge in the ‘Pension Savings Tax Charges’ boxes in the Additional Information section of their self-assessment tax return. Here they’ll need to confirm the amount by which they exceeded their annual allowance, and the amount of the charge to be paid by the scheme.