Calculating 2019/20 annual allowance charges and using Scheme Pays
03 December 2020
03 December 2020
Many clients will shortly be completing their tax returns for tax year 2019/20. One important aspect of that, particularly for high earners and those in defined benefit schemes is ensuring they have correctly calculated that their pension inputs are within their annual allowance and if not report any excesses and decide how their tax charge will be paid.
The first thing to calculate is the pension input for the tax year. This is straightforward for those with defined contribution pension schemes, as it is simply the total gross value of contributions paid into their plan during the tax year. For members of defined benefit schemes, the situation is more complex and in most cases, they need to rely on the figures provided by the scheme.
Those who have exceeded the £40,000 annual allowance in the scheme should have automatically been sent Pensions Savings Statements back in October at the latest. However, this doesn’t always help those who are members of multiple schemes and those who are subject to tapering. Where the client hasn’t received a Pensions Savings Statement they should request the inputs from the scheme as soon as possible.
Once the pension input for the year has been calculated the next thing to check is whether the client is subject to tapering. Although the limits for tapering increased substantially from tax year 2020/21, for 2019/20 the original lower limits still apply. Where Threshold Income exceeds £110,000 it is necessary to calculate the Adjusted Income. Where Adjusted Income exceeds £150,000 the client’s annual allowance will be tapered down by £1 for every £2 of income in excess of £150,000. The minimum tapered annual allowance for 2019/20 is £10,000 where income is £210,000 or more.
Where the client has exceeded their annual allowance for 2019/20 it is then necessary to look back and see if there is any carry forward available from any of the previous three tax years. If there has also been an excess in any of the previous three years then they may need to go back even further to get an accurate picture.
Having allowed for carry forward, if there is still an excess then this needs to be recorded in Box 10 of SA101.
The excess will be charged at the client’s highest marginal rates of income tax and so effectively claw back the tax relief obtained on the contribution. It is important to make sure they also claim any additional tax relief they are entitled to on their contributions eg. if they are higher or additional rate taxpayers and have made contributions to a relief at source scheme.
The client then needs to decide whether to pay the tax charge themselves or to use scheme pays where it is available. The scheme is only obliged to offer scheme pays where the annual allowance charge exceeds £2,000 and the client has paid more than the standard annual allowance, ie £40,000, into the scheme. This means that most clients who are subject to the tapered annual allowance will have to rely on the scheme offering voluntary scheme pays. The client would need to check if this is an option directly with their scheme.
Where scheme pays is available and the client wishes to make use of it, they note the amount of tax paid or payable by the scheme in Box 11 of SA101. They then make an election to the scheme to pay the equivalent charge. The scheme will then deduct the amount of the tax charge from the pension fund and pay this over to HMRC.
Scheme pays can be a useful and straightforward option for those in defined contribution schemes.
For defined benefit schemes the decision is more complex. This is because the tax charge will be converted into a reduction in guaranteed annual pension income in retirement based on factors determined by the scheme actuary. This can sometimes make using scheme pays with defined benefits scheme an expensive option.
There is an advantage of using scheme pays for all types of schemes where the client is likely to exceed the lifetime allowance. The amount deducted to pay any annual allowance charge reduces the value of benefits for lifetime allowance purposes.
Another point to be aware of when using voluntary scheme pays is that technically the liability for the tax is due by 31 January in line with the self-assessment deadlines. If the scheme doesn’t pay the funds over to HMRC until later, which will generally be the case, HMRC can charge late payment penalties and interest.
The deadline for providing schemes with a mandatory scheme pays election is 31 July in the year following the end of the tax year in which the charge relates. So, 31 July 2021 for annual allowance charges in respect of 2019/20. Many schemes will use the same deadline for voluntary scheme pays elections.
Where a client is unable to confirm their annual allowance charge by the 31 January 2021, they should make an estimate of the annual allowance charge on their tax return and in the scheme pays election if they are using it. The scheme pays election can be amended for up to four years following the 31 July 2021 deadline. They can then correct their tax return and election when they have the accurate figures.
The increase in the taper limits for 2020/21 onwards should mean that far fewer clients will be subject to tapering and in turn the annual allowance charges from this tax year onwards but for 2019/20 returns many will still need assistance in completing the pensions aspects.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.