Ptm056300 - annual allowance: tax charge: who pays - hmrc internal manual

PTM056300 - ANNUAL ALLOWANCE: TAX CHARGE: WHO PAYS | Glossary | PTM000001 | |———-|————————————————————————————-| When an annual allowance charge is due Who pays the annual allowance charge?

The conditions for ‘Scheme Pays’ to apply When the scheme administrator will not be liable How much annual allowance charge the scheme will have to pay Where a pension scheme pays a member’s

annual allowance charge liability on a voluntary basis Consequential adjustment to the member’s pension benefits WHEN AN ANNUAL ALLOWANCE CHARGE IS DUE Section 227 Finance Act 2004 The

annual allowance charge is a tax charge on the individual. Normally, it arises where the total pension input amount for an individual in pension input periods which end in the tax year

concerned exceeds the amount of the annual allowance for that tax year and any unused annual allowance from recent previous tax years. Where the total pension input amount exceeds the annual

allowance, the annual allowance charge will be levied on the excess. From 2015-16, individuals who flexibly access a money purchase arrangement will be subject to the money purchase annual

allowance in addition to the annual allowance. Depending on their circumstances, it is possible for such individual’s to have an annual allowance charge liability despite their total pension

input amount being less than their available annual allowance. For example, where their only pension input amount is a ‘money-purchase’ input that exceeded the money purchase annual

allowance. WHO PAYS THE ANNUAL ALLOWANCE CHARGE? Sections 237A and 237B Finance Act 2004 Normally the individual will pay their annual allowance charge liability and account for the payment

by completing a Self Assessment tax return. (See PTM056200) From 11 August 2011 an individual may have the right to elect to require the scheme administrator of their pension scheme to pay

some or all of their annual allowance charge liability on their behalf in return for an appropriate reduction in their pension benefits. This is known as ‘Scheme Pays’. If certain conditions

are met, the member will be able to notify their scheme that they require them to pay their annual allowance charge and the scheme administrator will have to: * pay to HMRC the amount of

tax that the individual has required the scheme to pay and * reduce the member’s pension benefits appropriately. Top of page THE CONDITIONS FOR ‘SCHEME PAYS’ TO APPLY Sections 237B and 237E

Finance Act 2004 An individual can notify their scheme administrator that they require the scheme to pay their annual allowance charge liability only if certain conditions are met. (See

PTM056400) If the conditions are met then the member must give their pension scheme a notice setting out the amount of the annual allowance charge that they require the scheme to pay for

them and the tax year to which the charge relates. Once the scheme has received the notice then they become jointly and severally liable to the annual allowance charge with the member. The

scheme must also make an adjustment to the member’s benefits to reflect the amount of the tax that they have paid. However, contracted out Guaranteed Minimum Pension benefits cannot be

reduced in order to pay the charge and this may mean that the scheme is unable to pay some or all of it. Top of page WHEN THE SCHEME ADMINISTRATOR WILL NOT BE LIABLE Sections 237C and 237D

Finance Act 2004 If a member notifies their scheme administrator that they want the scheme to pay their annual allowance charge it may be possible for the scheme administrator to apply for a

discharge of their liability to the member’s annual allowance charge. (See PTM056470). However, a discharge can only be given on certain grounds and if these grounds are not met then the

scheme administrator will remain liable for any annual allowance charge liability that the member has notified to them. A scheme will not have to pay the annual allowance charge, even if the

member satisfies the statutory conditions and has given the scheme administrator notice in the requisite timescale, in the following circumstances: * the scheme is being assessed by the

Pension Protection Fund at the time the member gives their notice to the scheme or, at the time that an assessment period begins, the scheme has not yet paid the tax following an earlier

notice from the member * the scheme would be unable to make an adjustment to the member’s benefits to take account of the tax paid because the benefits include contracted out rights. This

exception does not apply to rights derived under Section 9(2B) of the Pension Schemes Act 1993 * the member’s rights have been transferred to another scheme (See PTM056470) * the deadline

for the member to ask the scheme to pay has passed before the member requests that the scheme pays. Top of page HOW MUCH ANNUAL ALLOWANCE CHARGE THE SCHEME WILL HAVE TO PAY Sections 237B

(2A), (3) and (4) Finance Act 2004 MONEY PURCHASE ANNUAL ALLOWANCE DOES NOT APPLY There is a maximum amount an individual can elect to require their scheme to pay. If the individual is a

member of a single pension scheme then they can require that scheme to pay up to all of their annual allowance charge liability for the tax year. (This is provided their annual allowance

charge liability for the tax year is more than £2,000.) If the individual is a member of more than one pension scheme then, provided their annual allowance charge liability for the tax year

is more than £2,000, they can require any of their schemes in which their pension savings for the tax year are more than the annual allowance (for example, for tax year 2016-17, this means

more than £40,000) in that scheme alone to pay part of their liability. Where the individual is a member of more than one scheme they cannot elect to require just one scheme to pay all of

their liability or simply divide the liability equally between all of the schemes that they are a member of. The maximum amount a member can require a scheme to pay is based on the amount of

their pension savings that exceeded the annual allowance in that scheme alone. MONEY PURCHASE ANNUAL ALLOWANCE APPLIES From 2015-16 onwards an individual might have an annual allowance

charge liability as a result of the application of the money purchase annual allowance. In effect, application of the money purchase annual allowance means the individual’s annual allowance

charge liability is greater when compared with the individual’s annual allowance charge liability (if any) had the annual allowance applied. Where an individual’s annual allowance charge

liability is by reference to the money purchase annual allowance, the individual cannot elect to require a pension scheme to pay any amount of the individual’s annual allowance charge

liability if the individual’s annual allowance charge liability by reference to the annual allowance would have been £2,000 or less. If the amount of the annual allowance charge by reference

to the annual allowance would have exceeded £2,000 the individual can elect to require the scheme pay an amount of the individual’s tax charge. The maximum amount the individual can require

a scheme to pay is based on the amount of their pension savings that exceeded the annual allowance (for example, for tax year 2016-17, this means exceeded £40,000) in that scheme alone and

the amount of tax that would have been due by reference to the annual allowance. For example, if the individual’s annual allowance charge is £5,000 by reference to the money purchase annual

allowance and would have been £3,000 by reference to the annual allowance the maximum possible amount that the individual could require the scheme to pay is limited to £3,000. Top of page

WHERE A PENSION SCHEME PAYS A MEMBER’S ANNUAL ALLOWANCE CHARGE LIABILITY ON A VOLUNTARY BASIS If a member does not meet the conditions for ‘Scheme Pays’ to apply, their pension scheme may

agree to pay their annual allowance charge liability on a voluntary basis. If they do this, the liability for the annual allowance charge will remain with the member until the charge is

paid. This means that if, for any reason, the scheme does not pay this within the required time limits, the member will still be liable for the payment of the charge and may incur interest

and penalties. Top of page CONSEQUENTIAL ADJUSTMENT TO THE MEMBER’S PENSION BENEFITS Section 237E Finance Act 2004 Where a member meets the conditions for Scheme Pays and notifies their

scheme administrator that they require the scheme to pay their annual allowance charge liability, the member’s pension benefits (or the amount available for the provision of these) will be

adjusted by the scheme to reflect the annual allowance charge liability that the scheme has paid on the member’s behalf. Where a pension scheme pays a member’s annual allowance charge

liability on a voluntary basis but does not reduce the member’s benefits in the scheme to take account of the tax the scheme has paid then there could be adverse consequences for the member.

In these circumstances the member may also become liable to an unauthorised payment charge on the amount of their liability that the scheme has paid on their behalf. This will also be the

case if the scheme does not make an adjustment to the member’s benefits following receipt of a notice from the member requiring the scheme to pay the member’s annual allowance charge

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