- A tax charge applies if pension savings exceed the annual allowance and any carry forward.
- Clients can pay the charge themselves or use "scheme pays" through their pension provider.
- "Scheme pays" is mandatory if certain conditions are met but can also be offered voluntarily.
- Quilter supports both mandatory and voluntary options.
Key takeaways
1. The Annual allowance
The annual allowance is the amount of tax relievable contributions that can be paid into a pension each tax year without there being a tax charge. Normally the annual allowance is £60,000 but it can be lower if you have a tapered annual allowance or have triggered the money purchase annual allowance.
Prior to age 75, investor, employer and 3rd party contributions all count towards the annual allowance. After age 75 only employer contributions count towards the annual allowance.
2. Carry forward
Unused annual allowance from the three previous tax years can be added (carried forward) to the current tax year’s annual allowance. You can only carry forward from a previous tax year if you were a member of a registered pension scheme for at least part of that year.
If you have triggered the money purchase annual allowance, carry forward is not available for contributions paid into money purchase schemes.
3. Annual allowance charge
If contributions are made above the annual allowance and there is no carry forward available, there will be an annual allowance tax charge.
The annual allowance charge is your marginal rate of tax. Essentially you will need to pay the amount of income tax, that you would pay, if the amount of annual allowance excess were added to your income.
4. Paying the annual allowance charge
You can pay the annual allowance charge by adding it to your self assessment. Alternatively you may be able to have the charge paid from your pension funds by your pension provider. When the pension provider covers the charge by taking it directly from your pension fund, this process is referred to as "scheme pays”.
There are two types of “scheme pays” – mandatory and voluntary.
5. Scheme Pays
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Mandatory scheme pays |
Voluntary scheme pays |
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If you request a mandatory scheme payment, and meet the requirements, the scheme must make this payment on your behalf |
This is where a scheme is not required to make a payment on your behalf but agrees to make the payment anyway. |
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The criterion for mandatory scheme pays is:
Additionally:
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Any payment that does not meet the criteria for mandatory scheme pays can still be paid but will be classed as a voluntary scheme payment. Examples include:
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Requests must be received no later than 31 July in the calendar year following the end of the tax year that the annual allowance charge relates to. |
Requests can be received at any time, but any request made after the 31 March following your self-assessment deadline for the relevant tax year may incur interest or a penalty from HMRC. |
6. How to apply for scheme pays
Each scheme will have their own procedure for requesting a scheme payment of the annual allowance tax charge. To apply for scheme pays with Quilter please complete this form.
7. Adjustment of the pension fund
As scheme pays, is a payment from your pension fund facilitated by the provider, there will be reduction to your pension to reflect the payment.
- A defined contribution (money purchase) scheme will simply deduct the amount paid from the value of the member’s fund.
- A defined benefit (final salary) scheme will adjust/reduce the benefits that have accrued for the member under the scheme.
Any other kind of pension scheme will decide what adjustment is appropriate to how the benefits will be paid from the scheme.
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.