Employees who are subject to the annual allowance tax charge on the value of their pension benefits have until the end of the year to take up the “scheme pays” option. This deadline is likely to affect a significant number of university employees who are members of defined benefit pension schemes, principally USS.

The 31 December deadline relates to the tax year 2011/12.  With effect from that year, the annual allowance was reduced from £255,000 to £50,000. For members of defined benefit schemes this annual allowance is based not on the amount of contributions into the scheme, but on the increase in value of an employee’s pension entitlement in that tax year. For that reason some higher paid employees may for the first time be subject to a charge to tax on the increase in the value of their rights in the scheme in excess of the annual allowance, without having received the cash to pay it.

As a way of helping employees manage this tax liability, the Government has introduced a “scheme pays” option. Subject to certain conditions, employees can now ask pension trustees to pay the tax by deducting it from their pension pot, with a corresponding reduction in their future pension benefits.

Employees who are subject to these new rules should have received a statement from their pension provider by 6 October. For this year the deadline for making a scheme pays election expires on the easily-overlooked date of 31 December. For future years the deadline will be on the 31 July falling 15 months after the end of the relevant tax year.  As this is the first time the new rules have kicked in, employers may wish to take steps to increase employees’ awareness of the deadline.