If you have exceeded your Annual Allowance you are required to pay tax on the excess at your marginal tax rate (the highest rate at which you have paid income tax during the 2019/20 tax year). This additional tax payment is referred to as an Annual Allowance tax charge.
To calculate your Annual Allowance tax charge simply multiply the amount you have exceeded your Annual Allowance by your marginal tax rate.
In the previous examples:
Chris was liable for a tax charge on £9,289. Her tax rate is 45%, so her Annual Allowance tax charge amounts to £9,289 x 45% = £4,180.
Alex was liable for a tax charge on £13,815. His tax rate is 45%, so his Annual Allowance tax charge amounts to £13,815 x 45% = £6,216.
Jordan was liable for a tax charge on £54,476. Her tax rate is 45%, so her Annual Allowance tax charge amounts to £54,476 x 45% =£24,514.
How to pay your Annual Allowance tax charge
You can pay this directly to Her Majesty’s Revenue & Customs (HMRC) via their website www.gov.uk/pay-self-assessment-tax-bill.
Alternatively, if the amount of your Annual Allowance tax charge is £2,000 or more and has resulted from an increase in your Plan benefits, you can ask the Trustee to pay the charge on your behalf from your benefits in the Plan. This process is called Scheme Pays.
How Scheme Pays works
Under Scheme Pays, you agree to give up some of the benefits you have built up within the Plan and in exchange the Trustee will pay the Annual Allowance tax charge on your behalf.
Applying for Scheme Pays
The deadline for requesting Scheme Pays has now passed so we are no longer able to accept your nomination form. You will therefore need to settle any Annual Allowance tax charge directly with HMRC through your Self Assessment Tax Return. The deadline for submitting your Self Assessment Tax Return is 31 January 2021.