Lisa Webster: Dealing with an eyewatering tapered annual allowance charge

Jenna Towler
clock • 4 min read

Lisa Webster had an interesting case cross her desk recently that highlighted some of the ongoing issues with the tapered annual allowance (AA) compounded by auto-enrolment...

An adviser had contacted me about a new client. The lady in question had a personal pension, and in the last few years had been making personal contributions of £32,000 net/£40,000 gross to use up her annual allowance. However, since 2016/17 (when the tapered annual allowance was introduced) her income hadn’t been below £400,000.

The adviser had to pass on the bad news that she would have been subject to the maximum taper – so her annual allowance in the tax years 2016/17 to 2019/20 was only £10,000. She is also one of the few people that has been made worse off due to the changes to the tapered annual allowance that came in at the start of the 2020/21 tax year. As her income is above £312,000 she has the maximum taper all the way down to £4,000.

Auto-enrolment woes

The news then got worse. It turned out that the client also had a workplace pension that her employer had been paying into for the last four years. This employer had auto-enrolled her and was paying in at the minimum rates – currently 8% - but generously based on her entire salary not just qualifying earnings. In her case this made the contributions significant. Her employer is based overseas, and the adviser’s client is their only UK employee, so it is quite possible they didn’t realise they didn’t need to make contributions on all earnings. There is also a strong possibility that they were not aware of the implications for their employee nor had ever heard of the tapered annual allowance. 

The result of all this was that even after using available carry forward, the client was facing a tapered annual allowance charge in the region of £50,000 for the years 2018/19 onwards.

The question then was how to notify HM Revenue & Customs (HMRC) of the charge, and the best way of paying it.

Reporting the charge

Annual allowance charges are usually reported via self-assessment. It is possible to amend previous self-assessment returns up to one year after the deadline – so for the 2019/20 tax year changes can be made up to 31 January 2022 and for 2020/21 up to 31 January 2023. This can be done online, if the original assessment was filed online, or by paper, if the original was paper-based.

For earlier tax years, so 2018/19 in this case, you must write to HMRC to set out the tax year being corrected, why the original return was wrong, and details of the underpayment of tax. HMRC will then issue an updated tax bill, along with a deadline for payment.

Paying the tax charge

The adviser was interested in scheme pays, and whether this could be used to pay the charge from one or both of the schemes involved.

There are two variants of scheme pays, what HMRC just call “scheme pays” - but to avoid confusion I will call compulsory scheme pays – and voluntary scheme pays.

Compulsory scheme pays

There are strict rules set out by HMRC as to when compulsory scheme pays can be used, but if these are met then the scheme becomes jointly liable with the member for the charge. As compulsory suggests – the scheme don’t have a choice about it.

Unfortunately, compulsory scheme pays wasn’t an option in this case. Not only are there deadlines for notifying the scheme (31 July 2021 would be the deadline for 2019/20 tax year) but the annual allowance must have been exceeded in the scheme concerned. For compulsory scheme pays it is always the £40,000 annual allowance that must have been exceeded, not the tapered annual allowance (or money purchase annual allowance where applicable). This client has never exceeded £40,000 in a single tax year in either scheme alone. 

Voluntary scheme pays

The rules for voluntary scheme pays are more relaxed – any annual allowance charge can be paid and technically there are no deadlines. However, if you are going to ask the scheme to pay, it may take longer than paying direct and there could be implications with late payment charges.

Importantly you can ask any scheme you are a member of to pay it, not just the scheme where the charge arose. But the scheme doesn’t have to offer it, and even when allowed, the liability remains with the member.

If you have agreement from the scheme then you will need to put the amount the scheme is paying, and the scheme PSTR (pension scheme tax reference) on the additional pages of the self-assessment, or in the letter to HMRC if you are making adjustments for earlier tax years.

Lisa Webster is senior technical consultant at AJ Bell

More on Featured

How advisers deal with the power of online customer reviews   

How advisers deal with the power of online customer reviews   

Number of ‘cold’ enquiries received from online research increases

Julia Bahr
clock 22 February 2023 • 4 min read

Chris Read: Onwards and upwards

Thankfully, lockdowns are over (for now) and it's time to emerge from our caves, writes Chris Read in his final pandemic-penned column for RP

Jenna Towler
clock 07 October 2021 • 5 min read

RP case studies: Ill-health early retirement

Jessica List looks at an ill-health retirement case study where a SIPP comes in handy...

Jenna Towler
clock 06 October 2021 • 4 min read

In-depth

Analysis: Advice M&A continues apace as FCA review looms

Analysis: Advice M&A continues apace as FCA review looms

Firms taking very different approaches to buying and selling

Isabel Baxter
clock 18 November 2024 • 7 min read
Your Autumn Budget briefing: Tax and pensions changes Labour could have in store

Your Autumn Budget briefing: Tax and pensions changes Labour could have in store

Budget comes as prime minister says country 'embrace the harsh light of fiscal reality'

Jen Frost
clock 29 October 2024 • 22 min read
In view: Plotting PFS change

In view: Plotting PFS change

From first operating loss since 2008 to sponsorship, board and revenue changes

Jen Frost
clock 17 October 2024 • 6 min read