Techzone

A new year and a fresh start, but the first significant date in the calendar year will soon be upon us. The self-assessment deadline on 31 January is when returns need to be filed and balancing tax payments made if penalties and interest are to be avoided.

Only this year, by concession, HMRC will not apply late filing penalties provided returns are submitted by 28 February, although interest on late payments may still apply from 31 January.

Obviously this deadline relates to a client's tax for the 2020/21 tax year, so there is little that can be done from a planning perspective.

But clients facing a pensions annual allowance tax charge may still have time to choose between paying this bill themselves, or requesting their scheme to pay it if they qualify for 'mandatory scheme pays'.

The rules for mandatory scheme pays are quite specific and if the conditions are met, the scheme is obliged to pay the charge on behalf of the member. Those eligible and wishing to pursue this route must include details on SA101 (the additional information pages of the self-assessment return), so this year they will have until 28 February to do this.

They must also submit a request to the pension scheme and provided this is done by 31 July 2022 there should be no interest or late payment penalties.

However, any annual allowance tax charge that cannot be paid under the mandatory rules must be still be paid by 31 January to avoid all penalties and interest. Returns submitted by 28 February will not attract a late filing penalty, but interest will still be added to any tax due from the usual filing date of 31 January.

Mandatory payments criteria

A client can only elect for their scheme to make a mandatory payment if:

• they paid more than the standard £40,000 annual allowance to the scheme, and
• the charge is more than £2,000

The mandatory liability for the scheme is limited to the tax on the excess over £40,000. This means that if a client has a tapered annual allowance because their adjusted income is over £240,000 in 2020/21, the scheme does not have to pay the charge on the excess payment between the tapered annual allowance and £40,000. However, it can agree to pay this on a voluntary basis.

For example, an additional rate taxpayer with a reduced annual allowance of £35,000 (assuming no carry forward) and a payment to the scheme of £45,000 would have an annual allowance tax charge of £4,500 (45% of the £10,000 excess). The scheme is only obliged to pay half of this under mandatory scheme pays, should the member so elect (i.e. the excess over £40,000).

Voluntary scheme pays window for 2020/21 may have already closed

Some schemes may agree to pay the AA charge even if it is outside the criteria required for a mandatory payment. Each scheme will have its own rules and deadlines on when this may be possible.

Schemes will typically need plenty of notice to make a voluntary payment. For the 2020/21 tax year this would normally have to have been made by August last year to ensure that the tax is paid in time to avoid interest and late payment penalties.

What are the penalties?

There are tax penalties for the late filing of returns, late payment, and also interest on late payments. HMRC provide a calculator for taxpayers to estimate what these might amount to. As previously mentioned, there will be no late filing penalties this year provided returns are submitted before 28 February, but interest may start to accrue from 31 January.

To re-iterate, as long as a client completes their tax return with details of how much their scheme will pay under mandatory scheme pays, and makes their election to the scheme by 31 July 2022, there should be no late payment penalties or interest applied.

Clients should note, however, that the calculation of the annual allowance tax charge and how much can be met under mandatory scheme pays is not the responsibility of the provider. Accountancy advice may be needed to get it right. Underestimating the tax due or how much the scheme is obliged to pay could result in late payment penalties. And unauthorised payment charges could arise if the scheme is asked to pay too much.

Scheme v personal payment

There are several issues that may influence the decision of whether to pay the annual allowance charge personally or ask the scheme to make the payment:

• A client may simply lack the liquidity to make the payment personally
• For those who can pay the charge themselves, this may reduce their estate for IHT
• For those potentially facing a lifetime allowance charge on their pension savings, this could be reduced by requesting that the scheme pays the annual allowance charge
• Requesting a payment from the scheme could delay any plans for a pension transfer until after the payment has been made
• The 'value' in asking a defined benefit scheme to make the payment will depend on the commutation factors used by the scheme and by how much the annual pension will be reduced

Summary

Clients should be aware of the consequences of missing tax reporting deadlines, but they may be less aware of their options for paying the annual allowance tax charge.

For the 2020/21 tax year, there is still time to elect for an annual allowance tax liability to be met under mandatory scheme pays, but it's too late to request a voluntary payment - at least if they wish to avoid penalties.

For those facing an annual allowance charge in the current tax year (2021/22), any requests for a voluntary payment by the scheme should be considered between the end of this tax year and August 2022 for the payment to reach HMRC by the 31 January 2023.