Glossary · UK
What is Scheme Pays Election?
A mechanism letting pension scheme members ask the scheme to pay their Annual Allowance tax charge directly to HMRC from the pension pot.
Full Definition
Scheme Pays is a mechanism that allows a pension scheme member to direct the scheme to settle their Annual Allowance (AA) charge with HMRC directly from the member's pension fund, rather than the member paying the charge personally. There are two forms. Mandatory Scheme Pays: the scheme must accept the election when the AA charge exceeds £2,000 AND the pension input amount to that scheme exceeds £60,000 in the same tax year (2026/27). Voluntary Scheme Pays: schemes may, at their discretion, accept elections for smaller charges. The scheme then reduces the member's pension entitlement by an actuarial amount equivalent to the charge paid. The member must notify the scheme of the election by 31 July following the end of the relevant tax year -- for example, by 31 July 2027 for a 2026/27 charge. The election must also be reported on the Self Assessment tax return. Scheme Pays is particularly useful for members whose AA charge is large but who have insufficient liquid assets to pay HMRC directly. The long-term cost is a permanently reduced pension, so members should weigh immediate cash-flow relief against reduced retirement income.