Understanding voluntary and compulsory scheme pays

  • Describe the background to changes to the annual allowance.
  • Identify the requirements of voluntary scheme pays and compulsory scheme pays.
  • List what there is to know about DB and DC scheme pays.

So if the charge has arisen due to the tapered annual allowance or MPAA alone being exceeded, this condition is not met. 

Second, the amount of the annual allowance charge must have exceeded £2,000, and again this must be in reference to the annual allowance rather than the tapered annual allowance or MPAA. 

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Once these conditions are met then there is no minimum amount the member can ask the scheme to pay.

For example, if the charge was £3,000 the member could ask the scheme to pay £1,000 and pay the remaining £2,000 personally.

The maximum the scheme can be asked to pay is the amount arising from exceeding the annual allowance in that scheme.

Once it is established that the conditions for compulsory scheme pays have been met, then there are certain deadlines that must also be adhered to. 

HMRC states that the member must notify the scheme by “July 31 in the year following the year in which the tax year to which the annual allowance charge relates ended”.

If you find that hard to follow you are not alone. For 2017 to 2018 the deadline is July 31 2019, while for 2018 to 2019 it is July 31 2020.

The earliest the member can tell the scheme is April 6 after the year in which the charge has arisen e.g. if you know your client has exceeded the annual allowance in 2018 to 2019, the earliest you can ask the scheme to pay will be April 6 2019.

The exception to this rule is the year in which the member reaches age 75 or fully crystallises all their benefits. In these instances they must notify the scheme before benefits are accessed/their 75th birthday.

This is so that schemes can reduce the benefits available to account for the deduction of the charge. 

Voluntary scheme pays

So, what are the options when the compulsory conditions are not met? The most obvious one would be to pay the charge personally, but it may also be possible to ask your scheme to pay on a voluntary basis.

The rules for this are much more relaxed – any annual allowance charge can be paid, be it arising from the MPAA, tapered annual allowance or annual allowance.

Technically there are no deadlines – but more on that in a moment. And you can ask any scheme you are a member of to pay it, not just the scheme where the charge arose.

But the scheme does not have to offer it. And even if the scheme does allow it, the liability remains with the member. 

Unsurprisingly, since the introduction of the tapered annual allowance, we have seen a big increase in the number of requests for voluntary scheme pays.

Under this option the liability for the charge remains with the member, and as such is due by the usual self-assessment deadline – i.e. January 31 in the following year.