Scheme pays

Letting the pension settle your tax charge, and what it costs you later.

If you face an annual allowance charge, you can pay it yourself or ask the scheme to pay it for you. Scheme pays is the second option, and it's used heavily in the NHS because the charges are large and the tax falls due on money nobody actually received.

How it works

The scheme pays the charge to HMRC. In exchange, your pension benefits are permanently reduced.

The reduction isn't a simple deduction of the amount paid. It's an actuarial adjustment reflecting your age when you make the election and how long the scheme expects to pay your pension. The younger you are, the longer the reduction applies and the more a given charge costs you in lost pension.

It applies for the rest of your life and, where relevant, affects dependants' benefits too.

Mandatory and voluntary

Mandatory scheme pays is a statutory right. The scheme must accept your election where the charge exceeds a set amount and your pension growth in that scheme exceeded the standard annual allowance.

The limitation that matters: mandatory scheme pays is measured against the standard allowance, not your tapered one. If your allowance was tapered to £20,000 and your growth was £45,000, you have a charge but may not meet the mandatory test, because £45,000 is below the standard £60,000.

Voluntary scheme pays exists to cover exactly that gap. The NHS scheme offers it, but it's discretionary rather than a right, and the deadlines are different and tighter.

This distinction catches tapered members constantly. They are the group most likely to face a charge and least likely to qualify for the mandatory route.

Deadlines

Both routes have deadlines, and missing them means paying the charge personally.

The deadlines differ between mandatory and voluntary elections, and the voluntary ones are generally earlier. They are also not the same as the Self Assessment deadline, which is where people get caught, assuming that because the tax return isn't due until January the election isn't either.

Check the current deadlines with NHSBSA directly and diarise them. They are the most consequential dates in this whole subject, and this is not a page to rely on for them.

Should you use it?

There's no general answer, and anyone offering one doesn't know your circumstances.

The case for: the charge falls on pension growth you never received as cash, and finding a large sum from taxed income to pay tax on money you can't touch is a genuine hardship. Scheme pays converts an immediate cash problem into a smaller pension later.

The case against: you're effectively paying interest, in the form of an actuarial reduction that may cost considerably more over a long retirement than the charge itself. Paying from savings, if you have them, is often cheaper in the long run, particularly for younger members where the reduction applies for longer.

The middle option people forget: you can use scheme pays for part of the charge and pay the rest yourself.

What matters is your age, whether you have accessible savings, what those savings would otherwise do, and how long you expect to draw the pension. It's an arithmetic problem with a personal answer, and it's worth modelling rather than defaulting.

The paperwork

You declare the charge on your Self Assessment return whether or not the scheme pays it. If you use scheme pays, you report the charge and indicate the scheme is settling it.

Keep records of every election. With the McCloud remedy having revised earlier years, the history of what was charged and how it was settled matters more than it used to.

If you've already used it

Elections made during the remedy period may have been affected by the rollback, and where a charge was recalculated there are correction mechanisms.

If you used scheme pays for a year between 2015 and 2022, it's worth checking whether your position changed.

This article is for general education only and isn't personal advice. Scheme pays deadlines and eligibility are set by scheme rules. Confirm the current position with the NHS Business Services Authority, and take advice before making an irreversible election.