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    Time is running out to manage tax charges by Sarah Brown
    Date Published
    22 August 2017

    As many of us enjoy the August break, only the most organised pension scheme members will be spending their time on the beach considering their tax return or pondering the annual allowance, which restricts the amount of tax-relieved pension savings that can be made each year. However, many higher earners need to take action now; otherwise they may need to meet any annual allowance tax charge out of their non-retirement savings rather than through their pension scheme. This means that those responsible for pension schemes should have the annual allowance at the top of their current agenda.

    From April 2016, higher earners started to be subject to a tapered annual allowance.  In particular those earning over £150,000 have an annual allowance which is lower than the standard amount of £40,000, ultimately falling to just £10,000 for those earning £210,000 or more. Many individuals may be expecting to use a facility known as “scheme pays” to meet any tax charge that arises due to exceeding the annual allowance.  Under scheme pays, a member can opt for their scheme to pay their tax charge and to reduce their pension accordingly.  This is often an attractive option, as it means that the member does not need to dip into their other savings or income to meet the tax charge.  A little known consequence of the introduction of the tapered annual allowance is that this facility will not necessarily be available to individuals, and if it is available, then the deadline for choosing this option may be much earlier.
    Broadly speaking, an individual can only compel their scheme to meet any tax charge in respect of savings on the scheme over and above the standard annual allowance of £40,000 even if their actual annual allowance is lower than this because of the taper. This means that any tax arising on savings between an individual’s tapered annual allowance and the standard annual allowance of £40,000 may fall to the member alone.  This could result in a tax charge of as much as £13,500 having to be met by the member in the case of individuals with a £10,000 annual allowance who are subject to a marginal tax rate of 45% (the highest rate at the time of writing). However, some schemes will allow members in this position to access scheme pays on a voluntary basis, but members taking advantage of this will need to be aware that the timescales for doing this are much shorter than where members have a right to scheme pays. For example, for the 2016/17 tax year, members may need to decide whether they wish to use scheme pays within the next few weeks to allow time for all of the administrative steps to be met by HMRC’s deadlines.
    So what should schemes and members be doing about this? The first step is for schemes and sponsors to decide their policy – some have already agreed that they will facilitate members paying tax charges through the scheme, even if they are not compelled to by law.  Those deciding to offer this option should also consider whether and how to communicate this to members, taking into account the accelerated deadlines.  Members should consider as soon as possible whether they have a tax charge and, if so, whether they can use scheme pays to meet that charge.
    With these key decisions to be made and the short timescales to consider them, some may decide that a rainy summer’s day is the best time to start thinking about tax after all.

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