Use scheme pays or pay charge now!

tojoslaffy

I will have a £3000 tax charge as a result of exceeding my pension annual allowance (3yrs carry over used up). Is scheme pays the best option for me? What data do I need to consider when deciding? Thanks

Marcon

tojoslaffy said:

I will have a £3000 tax charge as a result of exceeding my pension annual allowance (3yrs carry over used up). Is scheme pays the best option for me? What data do I need to consider when deciding? Thanks

Impossible to know - you've given no information about your situation.

Good clear explanation here, though, which hopefully will enable you to take an informed view on how you wish to proceed: https://www.investcentre.co.uk/sites/default/files/AJBIC_Scheme_pays_guide.pdf

tacpot12

You  need to consider the cost of borrowing the £3000 from the scheme vs. the cost of paying it yourself. 

The cost of borrowing from the scheme is not just the interest they charge, but also any reduction in benefits that will occur. 

The cost of paying it yourself could be the interest rate you have to pay to borrow the money, or the interest you lose if you have to withdraw money from savings to pay the charge. 

Another factor is how close you feel you are to paying a Lifetime Allowance charge at some point in the future. If you  think a Lifetime Allowance charge is a possibility, then having some benefits deducted from the scheme might be a good thing and so the 'Scheme Pays' option would be better. If you are relatively young, you might be better of with paying the charge directly as you won't know how likely it is that you will ever pay a Lifetime Allowance charge, and so maximising your pension benefits is probably a better option. £3,000 isn't too much to have to pay directly.

michaels

Generally, scheme pays wins as it is taken from untaxed rather than taxed money.

tojoslaffy

Thanks. All your comments are much appreciated