Annual Allowance charges and ‘Scheme Pays’ – what you need to know…
17 July 2017
How do you get your annual allowance charge paid? Last month, Jacqueline Clezy, Technical Specialist at Prudential looked at clients unexpectedly receiving a Pension Savings Statement (PSS). In this article, she considers deadlines for receiving a PSS, then reporting and paying a tax charge where one arises.
Deadline for providing a PSS which is required automatically
The member must be given a PSS for the relevant tax year by 6 October following the end of that tax year. So for 2016/17 tax year, this deadline will be 6 October 2017.
Some schemes require the scheme administrator to receive information from another person, e.g. an employer, to allow the pension input amount to be calculated. There are regulations covering the specific information to be provided to the scheme administrator. In the event the scheme administrator has not received this information on time, the deadline for giving the PSS to the member is extended by three months from the day the scheme administrator receives the required information.
Deadline for providing a non–mandatory PSS requested by the member
The scheme administrator has until the later of
• Three months from receipt of the member request and
• 6 October following the end of the tax year
(but subject to the same caveat above where the scheme administrator relies on information from another person to calculate the pension input amount).
Reporting the Annual Allowance (AA) tax charge
Once the client has worked out their available annual allowance, including any carry forward where eligible, they can then work out if their total pension inputs exceed this available annual allowance. When there is an excess amount, they then work out the tax charge due.
The AA charge is not at a fixed rate but depends on the client’s taxable income and the amount of their pension saving which exceeds their AA. To find out the tax charge due, the client must work out the rate (or rates) of tax that would apply if their excess pension savings were added to their taxable income. The amount of the annual allowance charge can be in whole or in part at 20, 40 or 45 per cent, depending on the client’s taxable income and the amount of their pension savings over the available AA. It’s worth noting that there is no availability of any unused personal allowance, the AA charge starts at 20%.
Note – from tax year 2016/17 onwards the AA charge applies in the same way for an individual who is a Scottish taxpayer, except that the appropriate tax rates are replaced with the ‘Scottish main rates’ equivalent. In practice, this means the Scottish basic rate replaces basic rate, Scottish higher rate replaces higher rate and Scottish additional rate replaces additional rate.
The charge must be reported on the client’s self–assessment tax return (even if the scheme pays the charge).
Who pays the charge?
Ultimately, the member. Whether they pay from their own resources or ask their scheme to pay the charge on their behalf – which will be met by the scheme reducing the client’s pension fund/ benefit entitlement. In April’s edition of Oracle we covered the conditions that require to be met for a mandatory ‘Scheme Pays’ notice to apply. One important point to note is that there are different payment deadlines for the tax charge depending on how this will be paid.
Tax charge payment deadline
If the client intends to pay the tax charge themselves or their scheme have agreed to pay the charge on their behalf on a voluntary basis, the payment deadline is the normal self–assessment deadline i.e. 31 January following the end of the relevant tax year. So for an annual allowance excess in the 2016/17 tax year, the tax charge must be paid by 31 January 2018.
If mandatory ‘Scheme Pays’ applies, this deadline is much later. The client must give their pension scheme a notice stating (amongst other information) the amount of AA charge they require their scheme to pay and the tax year this relates to. The deadline for submitting the notice is by 31 July in the year following the year in which the tax year to which the AA charge relates ended. So, again using an AA excess for the 2016/17 tax year, this deadline will be 31 July 2018. The scheme then administer the ‘Accounting for Tax (AFT)’ process, which works on quarterly returns and specific set payment dates, meaning the tax charge may be paid as late as 14 February 2019.
You can find full details of the AFT process and timings here.
Annual Allowance charges can be partly paid by ‘Scheme Pays’ with the remainder being paid by the member
Let’s bring this to life with an example. Roy first joined a pension scheme in the 2015/16 post–alignment tax year. This allowed him a standard AA of £40,000. His pension inputs were £32,000, leaving £8,000 unused and available to carry forward to 2016/17.
In 2016/17 Roy’s adviser told him he had an AA of £48,000 (standard £40,000 plus £8,000 carry forward) so could pay £4,000 per month, which he paid from 28 April 2016 to 28 March 2017 inclusive. However, without consulting his adviser, Roy flexibly accessed some pension benefits on 1 December 2016. Roy did not understand the consequences of triggering the Money Purchase Annual Allowance (MPAA).
We need to look at contributions paid both before and after the trigger event.
Before – 28 April to 28 November = 8 months x £4kpm is £32,000
After – 28 December to 28 March = 4 months x £4kpm is £16,000.
Once you have flexibly accessed your benefits, future money purchase contributions are tested against the MPAA. You cannot carry forward unused AA from earlier tax years to increase the MPAA. For tax year 2016/17 this allowance was £10,000. For 2017/2018 it is £4,000.
What is the Annual Allowance excess amount?
Roy’s pre–trigger event contributions of £32,000 are tested against the £30,000 alternative allowance plus carry forward of £8,000, so £38,000 in total. This does not give rise to an excess, however, Roy has paid £16,000 after his trigger event which means he has paid an excess of £6,000.
How much is the tax charge?
Adding the £6,000 excess to Roy’s taxable income (£90,000) means the tax charge is due at 40%. £6,000 x 40% = £2,400.
Is mandatory ‘Scheme Pays’ an option?
We’ve previously covered the conditions that require to be met for a mandatory ‘Scheme Pays’ notice to apply, which you can read here.
In summary, the conditions are:
1. The member’s AA charge liability for the tax year has exceeded £2,000, and
2. Their pension input amount for the pension scheme for the same tax year has exceeded the standard AA amount (for tax year 2016/17 this means exceeded £40,000), and
3. The member notice must be submitted by the deadline specified by legislation. For an AA excess in 2016/17 the deadline will usually be 31 July 2018.
Where a client exceeds the MPAA, then 1 above is based on the total input in excess of the standard AA only. The £6,000 excess all relates to pension savings over £40,000 so the calculation of the tax charge is £6,000 x 40% = £2,400. As this exceeds £2,000 this condition is satisfied.
The pension input of £48,000 has all been paid to the same scheme so condition 2 above is also satisfied.
Finally, providing Roy submits a scheme pays notice by 31 July 2018, condition 3 above will also be met.
In summary, Roy can require his scheme to pay some or all of his tax charge of £2,400.
Now say Roy asks his scheme to pay £2,000 and he intends to pay the remaining £400 himself. What would the process and payment deadlines look like?
As you can see, where the scheme pays the charge under the mandatory ‘Scheme Pays’ rules, the deadline is much later than for a client paying the tax charge personally.
Accounting For Tax process
The AFT process, used by pension schemes, uses quarter dates for reporting and paying tax. The deadline for a voluntary scheme pays tax payment (where the conditions for mandatory scheme pays are not satisfied) is actually the same as the client’s self–assessment deadline, i.e. 31 January 2018 in this example. However, as the AFT process would be used, in reality this brings the payment date forward.
If the scheme reported the tax charge for the quarter ending 31 December 2017 they wouldn’t actually pay the charge until 14 February 2018 – missing the 31st January deadline.
So, in order to make payment by the client’s self–assessment deadline, the scheme would need to report and pay tax in respect of the quarter before, i.e. quarter ending 30 September 2017, and payment by 14 November 2017. Any client would need to be quick off their mark in asking their scheme to pay their annual allowance charge within these tight deadlines.
What is Roy’s annual allowance for 2017/18?
Roy flexibly accessed pension benefits on 1 December 2016. This means he is subject to the MPAA from that point forwards. Is the MPAA for 2017/18 £10,000 or has it reduced to £4,000? We don’t know.
Based on the Finance Bill (No. 2) 2017 as announced in the 2017 Spring Budget, the MPAA was to reduce to £4,000 from 6 April 2017. However, the clauses relating to this reduction were dropped prior to the dissolution of parliament for the general election. The incumbent government have stated that it is their intention to reintroduce this reduction early in the next parliament so although, currently, the MPAA is still £10,000, it is unclear whether or not any future reduction will apply retrospectively.
If Roy was to make a pension contribution of £10,000 now, and the MPAA reduction is reintroduced with the effective date of 6 April 2017, then Roy would have an AA excess of £6,000 in respect of tax year 2017/18.
This situation would not meet the conditions for mandatory Scheme Pays – neither conditions 1 nor 2 mentioned earlier would apply. Roy would need to pay the AA charge himself within the 2017/18 self–assessment tax return timescales, or his scheme may agree to pay the charge on his behalf on a voluntary basis using the AFT deadlines as covered above.
Now that the general election is over and the votes have been counted, let’s hope the Government make clear their intentions for reintroducing any reduction to the MPAA soon.
For more technical help by Prudential’s experts visit the PruAdviser website where you can find generic articles and analysis of legislation and consultations.