Forces Pension Society

Fighting for the forces and their families

Annual Allowance (AA) & ‘Scheme Pays’

May 9, 2018
Taxes

Scheme Pays is a facility available to personnel with an Annual Allowance tax charge in excess of £2k.

It is a worthwhile option that results in the tax charge sitting as a ‘debt’ on the service person’s pension file that is then paid when the pension becomes payable (an annual abatement is applied to the annual pension income to repay the debt and the lump sum is also reduced by a one-off abatement). There are advantages to electing for Scheme Pays rather than paying the tax bill at the time it occurs – but there are also a couple of disadvantages – one of which is the debt that sits on the pension account grows (by CPI) each year until the debt can be paid – for AFPS 75 scheme debts this is normally when the individual leaves the services and the pension comes into payment.

However, AFPS 15 scheme pensions are not normally payable until State Pension Age (unless an individual serves to Age 60 or beyond) and therefore the scope for CPI growth on any ’15 scheme AA Scheme Pays debt is considerable – if the debt occurs at Age 45 (for example) and the individual’s SPA is Age 67 – that is 22 years of inflationary growth that will occur, increasing the original debt substantially.

Personnel can service an AA tax charge by paying some directly to HMRC and electing for Scheme Pays for the remainder. However, if the overall AA tax charge results from growth in both AFPS 75 and AFPS 15 scheme accruals, it is not possible to pay your AFPS 15 element directly to HMRC and elect to use Scheme Pays for the AFPS 75 element – you can split the overall bill if you wish, but you cannot tell HMRC (or indeed Veterans UK) to split the liability by scheme.

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