PTM056450 - Annual allowance: tax charge: scheme pays: member becomes entitled to all benefits
Glossary |
Timing of notification - position up to 27 July 2015
Timing of notification - position after 27 July 2015
Making an adjustment to the member’s benefits
Defined benefits arrangements - position before 6 April 2013
Defined benefits arrangements - position from 6 April 2013
Money purchase arrangements
Pension input amount calculation
Estimating annual allowance charge
Section 237B(6) Finance Act 2004
There are deadlines for a member to give a notice requiring a scheme administrator to pay an amount of the member’s annual allowance charge for a particular tax year.
Normally the deadline is 31 July in the year following the year in which the tax year concerned ended. For example a notice for the tax year 2014-15 must be given by 31 July 2016. (PTM056430 has more details about the deadlines.)
However, the deadline is brought forward when the member is due to become entitled to all benefits under the pension scheme for the member. The timing of the notification in these circumstances and the tax years to which it applies to is explained further down this page.
Bringing forward the deadline will forewarn the pension scheme that the member may, for example, take their benefits from the scheme before the scheme may have paid the tax that the member has asked it to pay.
This will allow the pension scheme to consider whether the reduction to the member’s benefits to take account of the tax to be paid can be made before the member becomes entitled to their benefits so that no reduction would need to be made once the member’s benefits have come into payment.
Timing of notification - position up to 27 July 2015
If a member is planning to take all of their benefits under a pension scheme in a particular tax year and they also want their scheme to pay an annual allowance charge for the same tax year in which they are taking their benefits then they will need to give the scheme notice of this before they become entitled to all their benefits.
This requirement applies where the entitlement to benefits is due to occur no later than 27 July 2015.
Similarly, if a BCE 5, BCE 5A or BCE 5B will occur in relation to a member in a particular tax year and the member wants the scheme to pay an annual allowance charge for that same tax year, the member will need to give notice of this before the BCE occurs.
This requirement applies where the BCE is due to occur no later than 27 July 2015. As of 6 April 2024, the concepts of the BCE5, 5A and 5B no longer exists.
The member’s notification must include a statement to explain that before the end of the tax year, they intend to take all of their benefits from the pension scheme and they must give the date when they expect to take their benefits, or when the BCE will occur.
Because the notice must be given before the end of the tax year in respect of which the notice relates it is likely that an estimated amount will need to be put in the notice and an amended notice might need to be given once the annual allowance charge for the tax year concerned becomes final (see below for more details about estimating the amount of an annual allowance charge).
Timing of notification - position after 27 July 2015
If a member is planning to take all benefits under a pension scheme in a particular tax year and the member also wants a scheme to pay an annual allowance charge for:
- the same tax year in which they are taking their benefits, and/or
- another tax year
the member will need to give the scheme a notice for the tax year (or tax years) concerned before becoming entitled to all the benefits.
This requirement applies where the entitlement to benefits is due to occur after 27 July 2015.
Where the notice is for the same tax year in which the member will be become entitled to all benefits under the scheme the member’s notification must include a statement to explain that before the end of the tax year, they intend to take all of their benefits from the pension scheme, or that a BCE 5, 5A or 5B will occur, and they must give the date when they expect to take their benefits.
Because the notice must be given before the end of one or more tax years in respect of which a notice relates it is likely that an estimated amount will need to be put in the notice(s) and an amended notice(s) might need to be given once the annual allowance charge for the tax year(s) concerned becomes final (see below for more details about estimating the amount of an annual allowance charge).
This will forewarn the pension scheme that the member may, for example, take their benefits from the scheme before the scheme may have paid the tax that the member has asked it to pay.
This will allow the pension scheme to consider whether the reduction to the member’s benefits to take account of the tax to be paid can be made before the member becomes entitled to their benefits so that no reduction would need to be made once the member’s benefits have come into payment.
Making an adjustment to the member’s benefits
Even though the member is taking their benefits in the same year that the scheme will become liable for the annual allowance charge, the scheme is still required to make an adjustment to the member’s benefits to reflect the tax paid.
Defined benefits arrangements - position before 6 April 2013
If the scheme did not make the adjustment before the member’s scheme pension was put into payment then the reduction of a pension already in payment otherwise than in exempted circumstances that applied at that time could have resulted in the future pension payments being unauthorised member payments.
Defined benefits arrangements - position from 6 April 2013
From 6 April 2013 the specific circumstances in which a scheme pension in payment can be reduced have been extended to a reduction as a consequence of the scheme administrator paying an amount of the member’s annual allowance charge. (See PTM062300 for further information.)
Money purchase arrangements
Giving the notice before the member becomes entitled to their benefits enables the pension scheme to consider when the adjustment will be made, particularly if the member’s benefit options include a lifetime annuity or short-term annuity. The positions above for defined benefits arrangements will apply if the member’s benefit options include a scheme pension.
Pension input amount calculation
Where a member has asked the scheme administrator to pay their annual allowance charge in the year that they are taking all of their benefits from the scheme and the scheme administrator will do this (either because they have become jointly and severally liable to the charge with the member or because they have agreed to pay the charge on a voluntary basis) the consequential adjustment to the member’s benefit entitlement will need to be taken into account as necessary when calculating the member’s pension input amount. There is an exception in respect of a joint and several liability where the adjustment is made in respect of an annual allowance charge liability that arose before 28 January 2015 and the notice was given before that date. See PTM053300 in the case of defined benefits arrangements and PTM053400 for cash balance arrangements for more details.
Estimating annual allowance charge
If the member does not have the information available to calculate the exact amount of their annual allowance charge then they can estimate this. For example, the member might not be certain of the exact amount where part of the tax charge may be at 45 per cent (or, for 2011-12 and 2012-13, 50 per cent) as it is uncertain how much of their income would be liable at the additional rate of tax.
When estimates are used the member should make a note in the 'Any other information' part of their tax return to explain that an estimated figure has been used when calculating the amount of the annual allowance charge and when they expect the final figure to be available. The member will also need to tick the box to show that they have used estimated figures on their tax return.
Once the member has received the details that are needed to work out the annual allowance charge accurately, the member can amend their tax return if this is within 12 months of the statutory filing date (more information about the deadlines for submitting an amended return can be found in the Self Assessment Manual at SAM124165 (external users please see http://www.hmrc.gov.uk/manuals/sammanual/SAM124165.htm). PTM056440 explains what should happen where a member amends their notice requiring the scheme to pay an annual allowance charge.
Where a member has estimated the amount of annual allowance charge due, they can complete their notice to the scheme administrator using estimated figures. In these circumstances, where the member has made a reasonable estimate of the tax charge due then this is acceptable and HMRC would consider that the conditions asked for in the notice are met.
See PTM053000 for information on how to calculate pension input amounts for different types of arrangement and PTM056000 for details of how to calculate the annual allowance charge.