From 6 April 2022 – but applied retrospectively from 6 April 2016 – new measures will extend the deadline for when a pension scheme administrator must report and pay the annual allowance charge, so that the deadline for paying the charge relates to when the scheme administrator is notified of the charge, rather than a fixed period after the end of the tax year.

‘Scheme Pays’ is where, in certain circumstances, the individual has elected for the pension scheme administrator to be jointly liable for the annual allowance charge of at least £2,000 in relation to that scheme, in return for an actuarial equivalent reduction in the value of their pension pot.

This measure focuses on changes to the Scheme Pays process that apply when an individual asks their pension scheme to pay an annual allowance charge in relation to an earlier tax year, and when the pension scheme administrator must report and pay that annual allowance charge to HMRC.

Although there are no limits to how much an individual can save or accrue in a registered pension scheme, there is an overall limit on the amount of an individual’s tax-relieved annual pension savings or accrual (including employer contributions). This is known as the annual allowance (sections 227 to 238A of FA 2004). Initially set at £215,000, it increased to £255,000 for 2010 to 2011. The annual allowance was reduced to £40,000 for tax year 2014 to 2015 onwards. The standard annual allowance is currently £40,000. 

The tapered annual allowance reduces pensions tax relief for higher earners by reducing the standard annual allowance by £1 for every £2 of income over the adjusted income limit of £312,000. 

Individuals with incomes in excess of the threshold income of £240,000 are affected, with a maximum reduction down to £4,000 for those with an income of £312,000 and above. Unused annual allowance from the three previous tax years for the individual can be carried forward and added to the annual allowance. If the individual’s pension savings for the tax year (pension input amount) exceed this total, the annual allowance tax charge is applied to the excess. The annual allowance charge is linked to the individual’s marginal rate of tax. The tax charge is not a penalty; it effectively recoups the excess tax relief that the individual has already received.

The liability for an annual allowance charge normally rests with the individual, but Finance Act 2011 provided for the individual to elect for the pension scheme administrator to be jointly liable for the tax charge. This is known as mandatory Scheme Pays. Where an individual has an annual allowance charge in excess of £2,000 and their pension input amounts for that scheme exceed £40,000, they can ask their pension scheme to pay the charge for them, in return for an actuarial equivalent reduction in the value of their pension pot.

In some cases, the pension scheme may choose to pay the annual allowance charge for a member when asked, even if they don’t have to. This is referred to as voluntary Scheme Pays.

Where the individual has an annual allowance charge, they must report it on their self-assessment return and, where appropriate, that they want the scheme to pay the charge. The individual must tell the scheme by 31 July in the year following the end of the tax year.

The scheme administrator must report the annual allowance charge to HMRC in their accounting for tax return (AFT) for the quarter ended 31 December following the end of the tax year. The AFT must be delivered to HMRC within 45 days of that quarter ending, so by 14 February.

Proposed revisions

This measure focuses on changes to the Scheme Pays process that apply when an individual asks their pension scheme to pay an annual allowance charge in relation to an earlier tax year, and when the pension scheme administrator must report and pay that annual allowance charge to HMRC.

This measure will require the scheme to pay the charge if it arises because of a retrospective change of facts, the charge is £2,000 or more, and an individual asks the scheme to pay it within the new deadlines.

This measure will extend the deadline for when the scheme administrator must report and pay the annual allowance charge, so that the deadline for paying the charge relates to when the scheme administrator is notified of the charge, rather than a fixed period after the end of the tax year.