What’s the best way to pay the tax I now owe on my pension scheme?
I am in a final salary pension scheme and expect to have a tax charge of around £15,000 a year.
I understand that I can instruct the pension scheme to pay the tax charge rather than paying direct to HM Revenue & Customs, but I’ve been unable to find out how this works in practice.
If I ask the scheme to pay my liability each year, how would my final salary pension be reduced? Is there a standard calculation for working out how much I owe?
As long as certain conditions are met, you can ask your pension scheme administrator to pay some or all of the tax charge that arises from exceeding the annual allowance. In return, there will be a reduction of your pension benefits.
For you to qualify, your annual allowance charge liability for the tax year must exceed £2,000 and the total amount of your pension savings in the pension scheme for the same tax year must exceed the annual allowance, which is currently £40,000.
You must notify the scheme that you wish to use ‘Scheme Pays’ by 31 July following the end of the calendar year to which this charge relates. For example, if you want your scheme to pay your annual allowance charge for 2016-17, then you must serve notice no later than 31 July 2018.
Alternatively, if you are due to take all your benefits, you would have to give the scheme notice before taking the benefits.You will need to include the amount of the annual allowance
charge on your self-assessment tax return and show the amount paid by the pension fund.
The legislation does not stipulate how a defined benefits scheme should adjust benefits to reflect the payment of the annual allowance charge on behalf of a member, simply stating that adjustments should be “just and reasonable having regard to normal actuarial practice”.
For this reason, a standard calculation cannot be readily produced. For example, the amount to be deducted for an active member still saving for retirement will be different to a pensioner drawing on their pension. You should contact your scheme administrator for a valuation and seek independent financial advice to assess it.
David Weslet-Yates is a chartered tax adviser at Red & Black Accountancy.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.