There are certain points in relation to the tapered annual allowance for high earners and its interaction with the “scheme pays” facility and the provision of pension savings statements of which schemes should be aware.
“Scheme pays” is the facility whereby a member’s annual allowance (“AA”) charge can be met from his or her benefits. Where a member is subject to the standard AA (£40,000), schemes are required to offer “scheme pays” if:
• the member’s pension input amount for the tax year under the scheme exceeds the standard AA; and
• the member’s AA charge for the tax year exceeds £2,000.
Where these conditions are not met, the scheme can choose to offer members the “scheme pays” facility.
Where a member is subject to the tapered AA, it is not entirely clear from the legislation in what circumstances the scheme must offer “scheme pays”. However, HMRC has confirmed that the scheme is still only required to offer “scheme pays” if the above conditions are met i.e. if the member has exceeded the standard AA, not his or her tapered AA.
In addition, the scheme is only required to offer “scheme pays” to the extent that the member has exceeded the standard AA – in other words, if a member’s tapered AA is £15,000 and his pension input amount is £45,000, the member will only be able to use "scheme pays" as of right to meet the AA charge on the £5,000 excess over the standard AA, rather than to meet the AA charge on the £30,000 excess over his tapered AA. The member would need to meet the remaining AA charge from his income, unless the scheme was willing to allow him to pay the entire AA charge using "scheme pays".
As a result, schemes may wish to consider whether to allow members to use “scheme pays” to meet an AA charge in circumstances where the scheme is not required by law to offer the facility. Should schemes wish to offer this, a rule amendment will be required.
Pension savings statements
Schemes are required to provide a “pension savings statement” to any member whose savings under the scheme in any tax year exceed the AA. A pension savings statement must set out certain prescribed information about the member’s pension savings and the AA in the relevant tax year and the three preceding tax years. As with “scheme pays”, it is not completely clear from the legislation whether schemes are obliged to provide a pension savings statement where a member who is subject to the tapered AA has pension savings in the tax year that exceed the tapered AA.
However, HMRC has also confirmed that schemes only need to provide a pension savings statement where a member has pension savings under the scheme in the tax year which exceed the standard AA. There is no obligation to provide a pension savings statement if the member has pension savings that exceed his or her tapered AA, but do not exceed the standard AA. This confirmation is extremely welcome since schemes will be unlikely to know what a member’s tapered AA is as it will be affected by sources of income other than just those relating to the member’s employment.