It's the season for pensions savings statements

1. Why is the PSS sent?

A PSS is sent for the previous tax year for one of these two reasons;

• pension input amounts to the scheme exceed the standard Annual Allowance (AA) of £40,000 (as applied in the 2022/23 tax year).
• the scheme administrator believes the individual has flexibly accessed benefits and money purchase input amounts to the scheme exceed the Money Purchase Annual Allowance (MPAA)

In short it’s sent when the scheme is aware that the AA has been exceeded (they are unlikely to know the members tapered annual allowance position).

But just because this is sent doesn’t mean that there will automatically be a tax charge, carry forward may be available to mitigate this.

2. What action to take?

If a client has exceeded the annual allowance, finding out the clients carry forward situation is essential (although you can’t use carry forward for MPAA excesses in a money purchase scheme, you can use it if the client is tapered ). A PSS  details not only the inputs for the tax year that has just ended, but also the last three years input history for the scheme (but the client may be a member of other schemes).

Carrying out the correct calculations is essential. Carry forward doesn’t have to be claimed but evidence should be retained should HMRC ever require proof. Handily, we do have an annual allowance calculator that can do these calculations for you if you have the pension input amounts. It will also show if there have been excesses in the past that have become chargeable to the annual allowance charge (see later).

Further to this your client may be tapered for their AA, therefore they may not be notified if their contributions are under the standard AA. This can add more complexity to the situation, especially as the levels of the taper have changed over the years.

Although no PSS may be sent for those that are tapered, it’s perhaps good practice to check the situation for higher earning clients at their reviews to see if this has been an issue. More information on the taper can be found in our Tapered Annual Allowance article Again, our annual allowance calculator can do the numbers on this for you.

3. Who pays the tax charges that may arise?

The annual allowance charge is levied on the pension input amount that exceeds the available AA (including unused AA available to carry forward). The amount of the charge depends on the member's taxable income, or reduced net income in HMRC terms and where they live in the UK. For a client with a £20k AA excess and £10,000 of basic rate band left this will be £10,000 taxed at basic rate and £10,000 taxed at higher rate, £6,000 in total (based on UK rates).

It’s important to note that although this is taxed as if it were the clients income, adding this excess will not lead to loss of personal allowance or child benefit, it’s a standalone tax charge that is due.

Ultimately, it’s the client who has to pay this. How it’s paid can be based on several factors. Does the client meet the mandatory scheme pays conditions or is voluntary scheme pays available? If not, the client will have to pay from their own resources.

Whatever the option, this must be declared in a tax return to HMRC by 31 January 2024 for those that have an AA charge from 2022/23.

Full details on the scheme pays rules can be found in our article, but I’ll detail these briefly below.

For mandatory scheme pays to apply the following three conditions must be met;

• The member’s annual allowance charge liability for the tax year has exceeded £2,000, and
• their pension input amount for the pension scheme for the same tax year has exceeded the standard annual allowance amount (for tax year 2022/23 this means exceeded £40,000), and
• The member notice (for details of the content required see here) must be submitted by the deadline specified by legislation. For an AA excess in 2022/23 the deadline will usually be 31 July 2024. It can be brought forward to a date (i) prior to the member becoming entitled to all of their benefits from the pension scheme or (ii) before reaching age 75 (if once they reach age 75 they will have benefits that will be tested against the remaining available Lifetime Allowance at that time (as the LTA rules are still with us for this tax year)).

For public sector schemes the deadlines are different owing to the “McCloud judgement” and the subsequent remedy to fix this. The deadline for active and deferred scheme members for the 2022/23 tax year to report their AA charges will be 31 January 2025, for all others who are affected by the remedy this will 31 January 2027. Further details on this can be found in the Newsletter on the public service pensions remedy.

Where these conditions are not met, the scheme may agree to a request on a voluntary basis. However, the deadline for a voluntary scheme pays tax payment is actually the same as the member’s self-assessment deadline, i.e. 31 January following the end of the tax year the charge relates to.

Therefore, from an administration perspective in order for this to be paid on time the scheme would need to report and pay tax in respect of the quarter before, i.e. the quarter ending 30 September, and payment by 14 November. So members will need to be quick off their mark in asking their scheme to pay their annual allowance charge within these tight deadlines (which might be why some schemes are reluctant to offer voluntary scheme pays).