Public Sector Adjustment Calculation - Scheme Pays

Qwerty789

Hi everyone,

Today I received my Remedy PSS and so went through the HMRC Public Sector Adjustment Calculator using those figures and whatever else it needed. The calculation shows there is an increase in the annual allowance tax charge for one particular year of circa £18k. When I go through to the next stage, Submission, it wants me to chose who is going to pay the charge, me or the scheme. If I select the scheme will pay it, HMRC serves a notice on them to do so (?) and they will adjust the benefits paid to account for the tax that will be paid. I assume if I elect to pay, I literally have to pay that money now?

On the first option which I understand to be Scheme Pays, is this better than paying myself? Or worse? I'm not really clear on what would happen. 

On the second option, do I have to pay that full sum right now?

Apologies if these have been asked and answered elsewhere, and thanks for any helpful advice that is shared.

hugheskevi

Scheme Pays has a tax advantage as the payment is made from pre-tax money, whereas if you pay it yourself it will be from post tax funds. However, an interest rate applies (CPI+1.7%) which some find prohibitive when compounded over many years. 

If you want to pay yourself, then the payment is due immediately with no option to pay over time, as it is a tax liability. 

Your pension scheme should be able to give you a quote of how much your pension would be reduced to meet the charge which will inform your decision.

Qwerty789

Thanks hugheskevi, and apologies I didn't thank you sooner. I'm still not really sure how Scheme Pays works as HMRC make it sounds like a definitive instruction will be issued rather than a request for a quote etc. However as I don't have the cash I don't really have a choice but to opt for it.

I wondered if you could help me a contextual question - I know it's great to have this pension, I assume this remedy is also to my benefit, but I'm not really sure why I end up with a tax bill at the end of all this? Would I have had this same outcome if the remedy had been the outcome first time around? Is it "fair" by a reasonable yardstick?

Thanks again 

hugheskevi

I'm still not really sure how Scheme Pays works as HMRC make it sounds like a definitive instruction will be issued rather than a request for a quote etc.

Choosing Scheme Pays with HMRC is a binding commitment. You can request a quote from your scheme administrator prior to choosing to make the binding commitment to inform your decision.

I wondered if you could help me a contextual question - I know it's great to have this pension, I assume this remedy is also to my benefit, but I'm not really sure why I end up with a tax bill at the end of all this? Would I have had this same outcome if the remedy had been the outcome first time around? Is it "fair" by a reasonable yardstick?

Your pension accrual between 2015-22 has been retrospectively changed to be based on your legacy pension scheme rather than the post-2014/15 scheme.

As the schemes are completely different, the Pension Inputs created by membership of the scheme are completely different. This could have led to a past tax charge being either higher or lower. The outcome you have now is what you would have had if the change to the reformed 2014/15 schemes had not taken place.

The whole Annual Allowance process for Defined Benefit schemes could in no way be called fair by a reasonable yardstick - describing the calculation of Pension Inputs as a very crude approximation would be exaggerating the accuracy of the assumptions used. But it is what legislation demands, so you have no choice.