Annual pension allowance - how best to pay it back to HMRC

cisamcgu

Dear friends.


If there is an amount that needs to be paid back to HMRC because of too much contribution to the LGPS DB pension in one year, is it best to get the "scheme pays" option, or just to send a cheque to HMRC ?

By best, I mean tax efficient I think

Cheers
Andrew

hugheskevi

Scheme Pays is considerably more tax efficient.

Assume a charge of £10,000. Pay by cheque, it costs £10,000.

Pay by Scheme Pays and the money comes from pre-tax income. If a basic rate taxpayer when you receive the pension, £10,000 would have a 25% tax free lump sum, and 20% tax applied to £8000 (£1,600) so paying to HMRC would only cost you £8,400.

Scheme pays would also reduce pension for Lifetime Allowance, which could also be a consideration.