Voluntary scheme pays - late summer deadline

With the increases to all three pension annual allowances kicking in from the start of the tax year, much higher amounts can now be paid into pensions without fear of a tax charge arising.

Potential charges aren’t eliminated completely – just less likely going forward, and where they do arise, are likely to be at a lower value. The complex tapered annual allowance still exists, but with tapering only starting on income above £260,000 far fewer people will be impacted. Even those with the very highest incomes can now put in £10,000 before charges arise. Those who’ve flexibly accessed their pension can also now put in £10,000, and for everyone else the allowance is £60,000.

That’s all great news but right now we still have the matter of last year’s tax return to complete – and when looking back at 2022/23 the old limits still apply.

One of the many issues with the tapered annual allowance is that people don’t know what their income is until after tax year end. There are also those in defined benefit (DB) schemes who may not know their pension input until the tax year has ended.

For those that are just working out their 2022/23 income and pension input now, some may find they have a charge to pay.

So, if you do find there’s an annual allowance charge to pay (after you’ve also considered any carry forward that may be available), what do you do?

Annual allowance charges must be included in the self-assessment – so if the client is not already registered with HMRC then this will need to be done first. HMRC’s help sheet HS345 has links to its calculator, and information on working out the charge and which sections to complete.

When it comes to paying the charge itself there are potentially two options. The first it to pay it to HMRC direct, the other is to ask the pension scheme to pay it.

There are two types of “scheme pays” – the first is compulsory scheme pays. If certain conditions are met then the scheme has to agree to pay the charge. However, this can only be used if it is the annual allowance charge that is exceeded, not the tapered, or money purchase annual allowance.

Voluntary scheme pays is much more flexible and can be used to pay any annual allowance charge, and the charge doesn’t even have to have arisen in the scheme that pays it. For example, if a DB scheme has an input over the tapered annual allowance, but the member also holds a defined contribution (DC) scheme, the DC scheme could potentially pay the charge. Of course it is “voluntary” so the scheme doesn’t have to allow it – but in this scenario it may be worth checking if this is an option.

Although there are no official deadlines to use voluntary scheme pays, the tax is due by the usual self-assessment date of 31 January, and if this is missed there is a risk of late payment charges. However, because pension schemes pay tax to HMRC on their quarterly returns, in order to guarantee HMRC get the money before the self-assessment deadline the scheme needs to include it on their return for the period ending 30 September.

So if you do discover an annual allowance charge and want the scheme to pay, the real deadline could be a lot sooner than you think.