Scheme pays explained

When an annual allowance charge arises, it may be possible for the pension scheme to pay the charge rather than the member personally. As part of our Bitesize Technical series, Senior Technical Consultant, Lisa Webster explains the rules around scheme pays, including:

• What conditions must be met for compulsory scheme pays?
• Can the scheme pay the charge when the conditions aren’t met?
• Who is liable for the annual allowance charge under scheme pays?
• How should the member report that they are using scheme pays?

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on scheme pays

So, what is scheme pays?

Scheme pays is a mechanism by which the annual allowance charge can be paid out of a pension scheme, rather than by the member personally.

How many types of scheme pays are there?

There are two types of scheme pays – the first is compulsory scheme pays. If certain conditions are met, then the scheme has to pay the charge. The second is voluntary scheme pays, which is more flexible.

What are the conditions for compulsory scheme pays?

• The main annual allowance (£60,000) must have been exceeded in the scheme concerned.
• The annual allowance charge is at least £2,000.

Is there a deadline for applying for compulsory scheme pays?

For the scheme to be required to pay the charge in most cases the member must notify the scheme by 31 July in the tax year two years after the tax year to which the annual allowance charge relates. For example, for a charge relating to the 2023/24 tax year the notification must be received by 31 July 2025.

Who is liable for paying the annual allowance charge?

If the compulsory scheme pays conditions are met and the scheme notified by the deadline, then the scheme and member are jointly liable for the charge. Under voluntary scheme pays the liability remains solely with the member.

What is voluntary scheme pays?

Voluntary scheme pays is 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. However, as it is voluntary, schemes don’t have to allow it.

Is there a deadline for applying for voluntary scheme pays?

The liability for the annual allowance charge remains with the member, so the payment made by the scheme under voluntary scheme pays should also be paid by the member’s normal self-assessment deadline, and if this is missed there is a risk of late payment charges.

The scheme can still pay the charge on a voluntary basis later, but there is a risk the member may receive a late payment interest charge. In practice this charge hasn’t always been applied when the self-assessment has stated that the scheme will be paying, but this can’t be guaranteed.

How should the member report that they are using scheme pays?

Once the scheme has agreed to pay the charge – whether under compulsory or voluntary scheme pays – the member will need to complete the relevant information on their self-assessment.

The amount of the excess above the annual allowance, and the amount of the annual allowance charge to be paid by the scheme should be entered in the additional information pages under the Pension Savings Tax Charges section, along with the pension scheme tax reference number.

More Bitesize Technical

Take a bite out of 'Contribution refunds explained', the next and final instalment of our pension contributions Bitesize Technical series, or start from the beginning, here.