Using Scheme Pays to pay the annual allowance charge
Produced in partnership with Herbert Smith Freehills and Naveed Soomro of Squire Patton Boggs
Using Scheme Pays to pay the annual allowance charge

The following Pensions practice note produced in partnership with Herbert Smith Freehills and Naveed Soomro of Squire Patton Boggs provides comprehensive and up to date legal information covering:

  • Using Scheme Pays to pay the annual allowance charge
  • Conditions that must be met to use Scheme Pays
  • Where money purchase annual allowance applies
  • Exceptions to compliance with Scheme Pays
  • Liability for paying annual allowance charge under Scheme Pays
  • Discharge from liability to pay annual allowance charge
  • Voluntary payment of annual allowance charge
  • Notification to use Scheme Pays
  • Form of notice
  • Contents of notice
  • More...

Using Scheme Pays to pay the annual allowance charge

THIS PRACTICE NOTE APPLIES ONLY TO PENSION SCHEMES IN ENGLAND AND WALES

Scheme Pays, introduced by Schedule 17 to the Finance Act 2011 (FA 2011) allows a member to require their pension scheme to pay their annual allowance charge in certain circumstances. The scheme can then recoup this cost by reducing the member's pension benefits accordingly.

Given that FA 2011 reduced a member's maximum annual allowance from £225,000 to £50,000 (for tax years 2011/12, 2012/13 and 2013/14) and that the Finance Act 2013 further reduced the annual allowance from £50,000 to £40,000 from the tax year 2014/15 onwards, more members are likely to incur an annual allowance charge and therefore more pension schemes are likely to have to make use of Scheme Pays.

Importantly, one of the conditions to be satisfied for a member to require their scheme to use Scheme Pays is that the total amount of pension savings in the scheme for the same tax year must exceed the standard annual allowance of £40,000. This means that any reduction in annual allowance entitlement cause by the tapering provisions introduced on 6 April 2016 or the application of the money purchase annual allowance rules from 6 April 2015 (which was reduced from £10,000 to £4,000 with effect from 6 April 2017) are ignored for Scheme Pays purposes. For

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