Scheme Pays

What Is “Scheme Pays”?

“Scheme Pays” is a mechanism that gives you the option to ask your pension scheme administrator to pay on your behalf any tax charge due in relation to the excess of your pension savings above the Annual Allowance. In return,  your pension administrator will apply a reduction to your pension benefits reflecting the amount of the tax charge

If all of your pension benefits have been accrued in the same scheme, there is no limit to how much the scheme can pay on your behalf. However, where the benefits have accrued in different schemes, the most recent scheme is only obliged to reduce the pension benefits that have accrued in the current scheme.

Who can use Scheme Pays?                                 

You will be able to elect for Scheme Pays provided that:

  • Your tax charge for the tax year exceeds £2000.
  • The amount of pension savings in the scheme was more than the Annual Allowance for the tax year
  • Your written application is received by the pension administrator by 31 July, in the year following the end of the tax year to which the tax charge relates (e.g. 31 July 2015 for the 2013/14 tax year)

Applying For Scheme Pays

You must notify your scheme administrator, in writing or electronically, that you want them to pay an amount of your annual allowance tax charge in return for a reduction in your pension scheme benefits. You must sign and date the notification and if you are submitting the notice electronically you must confirm that you have personally submitted the notice.

When you make your election requiring your pension scheme to pay an amount of your annual allowance charge liability the administrator of that scheme will become jointly liable with you for the amount of tax that you have asked the scheme to pay. This joint liability applies from the time your pension scheme administrator receives your notification.

You and the scheme administrator have a ‘joint and several’ liability in respect of the amount of tax you have asked the scheme to pay. This means that both of you are legally obliged to pay the tax should the other party not do so.

The scheme administrator will pay to HMRC the tax charge you have asked the scheme to pay but you will have to report the amount of tax the pension scheme will be paying on your behalf on your own Self-Assessment tax return. You will however, continue to remain liable for any overall tax shortfall for the tax year in question.

Your notification to the scheme administrator must contain the following information:

  • Your title
  • Full Name
  • Address including Postcode
  • Your National Insurance number

You will also need to confirm:

  • The tax year the charge applies to
  • The amount of your annual allowance charge liability that you want the scheme to pay on your behalf for that tax year
  • That the amount of the liability you want the scheme to pay has been calculated at the proper rate

You must also state in your notification that you understand you cannot withdraw your notice and that your pension benefits will be adjusted to take account of the scheme paying the tax on your behalf.

Deadlines

Your notification must be received by the administrator by 31 July in the year following the end of the tax year to which the tax charge relates. The scheme will then be required to pay the tax charge on your behalf to HMRC. The scheme will have a deadline of 14 February of the year that follows the end of the tax year to which the liability relates.

For example if the you want your scheme administrator to pay your annual allowance charge for 2013-14 you must tell the scheme administrator by 31 July 2015 and the scheme will have a deadline of 14 February 2016 to pay the tax charge.

For tax charges in relation to the 2012/2013 Annual Allowance, the scheme will have a deadline of 14 February 2015 to pay the tax charge for members who elected for the scheme pays option by July 2014.

Once the election is made and received by the scheme it cannot be revoked but it can be amended. If you wish to change an election you will need to contact the scheme administrator as there are deadlines dependent on the time you wish to make the change.

The Pension Offset (Reduction) Calculation

For members of the Local Government Pension Scheme (LGPS) the amount of reduction is based on factors and methodology provided by the Government Actuaries Department (GAD).

The reduction (pension offset) is based on a factor at the relevant date. The relevant date (also known as the implementation date) will be the day after the end of the Pension Input Period. (See factsheet 30 for information on the Pension Input Period).

The initial pension offset is based on your Normal Pension Age (NPA) in the scheme, which in most cases will be your State pension age.

The Effect of Scheme Pays on Your Pension Benefits

  • The pension offset will initially be applied to your post 2014 Scheme Career Average (CARE) pension. If at retirement, your CARE pension is insufficient to cover the pension offset the balance of the offset will be applied to your final salary pension that you accrued between 1 April 2008 and 31 March 2014. If the pension offset cannot be met from your Care and post 2008 pension your case will need to be referred to the Department for Communities and Local Government (DCLG) for determination.
  • The initial pension offset will increase each year in accordance with Pension Increase Review Orders (currently CPI) during the period between the relevant date and your actual retirement date.
  • If you retire at a date other than your NPA the initial pension offset will increase or decrease in line with the early or late retirement factors in force at that time. If you retire before your NPA the pension offset will reduce as the pension will be in payment for longer. If you retire later than your NPA the pension offset will increase as the term the pension will be paid over will be shorter.
  • Different early retirement reduction factors apply for members who retire on grounds of ill-health.
  • The benefits payable to a spouse, civil partner or other partner who is eligible to a pension on your death will not be reduced as a result of the scheme pays mechanism. This will apply regardless of whether you die during active service, in deferment or after retirement.
  • No adjustment will be applied to children’s pensions.
  • No adjustment will be made to the lump sum death grant payable in respect of an active member who dies in service.
  • No offset will be made directly from the death in deferment lump sum grant that is payable in respect of deferred members who incurred an Annual Allowance charge prior to exit, and elected for the scheme pays mechanism. However the lump sum will be based on the deferred pension after any scheme pays offset has been applied.
  • No offset is made directly to any lump sum paid on death after retirement that is payable to pensioner members who incurred an Annual Allowance charge prior to exit, and elected for the scheme pays mechanism. However the lump sum will be based on the pension after any scheme pays offset has been applied.

Further details regarding Scheme Pays, including an HMRC Scheme Member Guide, can be found on HMRC’s website.

Information regarding the LGPS can be found on the pensions website. 

This information is provided solely for the purpose of considering the Scheme Pays Option in relation to the Annual Allowance. The information in this factsheet is based on our understanding of HMRC, and the current LGPS legislation. The pension administration team are not lawyers, financial advisers or tax advisers and you may wish to take separate legal, financial and tax advice on this matter

October 2014

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