For mandatory scheme pays the deadlines are more lenient. The scheme needs to be notified of the client’s intent to use scheme pays before July 31 following the end of the tax year in which the charge arose. That said, it will still need to be declared on the self-assessment form, so the figures will still need to be worked out by the January date.
A word of warning: I have known of schemes, in cases where they don’t appear to agree with the client’s request for mandatory scheme pays, trying to use carry forward as an excuse. The scheme has no right to calculate the available carry forward in order to decide if mandatory scheme pays applies – it is irrelevant.
Amount of deduction
The scheme must make sure that the adjustment made to the member’s entitlement to benefits is just and reasonable, having regard to normal actuarial practice. HMRC would expect a scheme to be able to demonstrate that the adjustment made was such.
Where the adjustment is not just and reasonable – or no adjustment is made at all – the payment of the annual allowance charge on behalf of the member by the pension scheme would be an unauthorised member payment.
I am unaware of any challenges to the adjustments made to pension benefits following the application of scheme pays, but that it not to say this could never happen.
Deductions in practice
Other than the requirement for there to be a just and reasonable adjustment to the member’s entitlement to benefits, the tax rules in relation to annual allowance charge payments – in cases where the member has elected to require the scheme to pay – do not place a requirement on when the adjustment must be made relative to when the tax has been paid.
The scheme administrator may decide to make the adjustment before the tax is paid over HMRC by the administrator, at the same time as the tax is paid, or after the tax is paid.
Even with money purchase schemes there can be various ways in which the deductions are made. However, this is usually as simple as a deduction made from the fund at the time that the scheme administrator pays the charge on the member’s behalf.
For a DB pension scheme there is a greater variation in the way in which the charge is funded. The result will be the same – a reduction in the benefits of the member in order to pay the tax charge.
