Tax and Scheme Pays
HMRC’s Annual Allowance Limit (‘AA Limit’) is a limit to the total amount that your pension savings can grow in a defined benefit pension scheme each year, for tax relief purposes.
If you do not reach your AA Limit in a particular tax year, the unused allowance can be carried forward to later tax years.
If you exceed your AA Limit in a particular tax year, and have no unused annual allowance to carry forward from the previous three tax years, you will be subject to an Annual Allowance Tax Charge (‘AA Tax Charge’).
You can pay the AA Tax Charge from your own personal finances. However, pension schemes must provide a scheme pays facility, known as a Mandatory Scheme Pays (‘MSP’) arrangement, where qualifying conditions are met.
If you do not meet the conditions for MSP to apply, you may be able to apply to use a Voluntary Scheme Pays (‘VSP’) arrangement instead.
A scheme pays facility works by having the pension fund pay the AA Tax Charge initially. The tax charge is repaid by the member once their pension comes into payment, by way of a reduction in their pension benefits.
For more information on the operation of MSP and VSP, and the eligibility criteria, please refer to the following guidance and election form.
- Eligibility Criteria (234 KB)
- SAB Guidance on Scheme Pays (491 KB)
- SAB Guidance on Proportioning Scheme Pays (284 KB)
- Voluntary Scheme Pays Member Election Form (72 KB)
- Voluntary Scheme Pays Scheme Manager Decision Form (10 KB)
- 1992 Scheme Pays Factors (89 KB)
- 2006 Scheme Pays Factors (134 KB)
- 2015 Scheme Pays Factors (67 KB)