Annual allowance reductions mean more people will incur tax charges but how many members know this? Helen Morrissey looks at what schemes should do to help members meet their responsibilities.
- Reductions in annual allowance mean more people will have to pay a tax charge.
- In many case it is the responsibility of the member to pay the charge when filling out a self-assessment tax return.
- HMRC has asked schemes to remind members of this issue.
The recent reductions in annual allowance mean that more people will find themselves facing a tax charge. However, how likely is it that everyone who incurs such a liability will pay it?
As it currently stands, schemes are obliged to offer a ‘scheme pays' facility if someone incurs a tax charge of more than £2,000 in relation to that particular scheme. This means that the scheme deducts the tax and pays it on behalf of the member.
However, if the liability is less than this it often means the member is responsible for paying the charge when filling out their self-assessment tax return. In newsletter 71 issued in August, HM Revenue and Customs (HMRC) highlighted the issue by making the following statement:
"Please remind your members that it is really important that those who have exceeded the annual allowance for 2014 to 2015 declare this on their self-assessment tax return (the deadline for submitting this is 31 January 2016). They'll also have to pay a tax charge."
According to Sackers partner Eleanor Daplyn, the note is recognition of how complicated the current situation is.
"The fact that HMRC has made this plea is acknowledgement of what a minefield this situation has become," she says. "Unless the ‘scheme pays' facility comes into play then responsibility to pay the liability rests with the member."
If someone only pays into one scheme then things are more straightforward. Should someone incur a liability then a pension savings statement is issued by the scheme administrator, which can be used when filling out the self-assessment form.
However, things become much more complex if a member incurs a liability by contributing to several schemes, according to Allen & Overy professional support lawyer Helen Powell.
"You won't always know for definite if someone has a liability as they could have been contributing to pensions elsewhere, for instance," she says. "Who would know?
"There is also the complication that people might have taken flexible access from another scheme which means their annual allowance goes down to £10,000. If this is the case then the member needs to get notice of this from the scheme, which then has to be passed on to other active schemes to which they are contributing. However, getting this documentation takes time."
She adds that the tapering of the annual allowance that comes into force next year will also add further complications.
Should schemes get involved?
This could result in a situation where members are increasingly likely to fall foul of HMRC tax rules, according to Broadstone Employee Benefits technical directorDavid Brooks. "If the person deals with their tax liability themselves then the scheme is not involved," he says. "They may not realise they even have a tax liability with regards to annual allowance, and in this case how will HMRC ever find out? Should schemes tell HMRC if scheme members have breached their annual allowance?"
Capita Employee Benefits head of marketing and research, Robin Hames does not believe this is an area that schemes should get involved in: "Our view would be that while issuing reminders via workplace is sensible, pension schemes really should not, and should not be expected to, work with individual members to assist with their self-assessment tax returns," he says. "Schemes have already taken on a significant burden in administering the ‘scheme pays' option. This, in itself, can be very complex (especially where a charge is incurred in the year of retirement) and impact the ongoing administration of members affected. It shouldn't be forgotten that this additional work was effectively imposed on schemes by HMRC to help manage the complexities and consequences of its tax relief reforms."
He added: "Furthermore schemes are already responsible for supplying the data for the pension saving statement. If a pension saving statement is issued to the member where they exceed the annual allowance, this is also reported via the Annual Event Report. So in essence schemes are effectively already telling HMRC if a member has exceeded the annual allowance. This data should tie up with what the individual supplies via the self assessment tax return.
Allen & Overy's Powell agrees that while trustees can help raise awareness of the issue they should not get involved in passing information to HMRC.
"HMRC are trying to get trustees on side in terms of nudging people towards doing the right thing," she says. "However, to no extent should trustees be informing HMRC on those who may have a liability under this. It has become a very complex situation."
Sackers' Daplyn believes that many schemes are already going above and beyond what they need to do in a bid to assist members in paying this liability.
"Many well run schemes are being very up front in offering more than they are legally required to with regards to the 'scheme pays' option," she says. "They don't want to see people being pursued for what could amount to several years of tax liability and so are offering 'scheme pays' where liability is less than £2,000 for that scheme. However, while this helps a lot of people it won't help those who have built up a liability across more than one scheme."
Allen & Overy's Powell believes that while schemes can issue information reminding people of a potential liability, there is still much that HMRC can do to ensure people are aware of their liabilities.
"HMRC needs to make it clear on the self-assessment tax return form as members may not read their scheme communications very thoroughly," she says. "For instance, the self-assessment form needs to make it clear in what circumstances the individual might trigger a charge so they can get their pension savings statement."
So while schemes should certainly do their best to remind members that they may have an annual allowance charge, their legal liabilities do not force them to do more than this. While such communications will no doubt alert some members to their potential liability, concerns remain that it may pass many people by.
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