The annual allowance charge is a tax charge that applies to the member and is usually paid via a self-assessment tax return. The liability is based on the member’s marginal rate of income tax. The excess is added to the member’s income after allowances and deductions have been taken off.

However it can also be paid on the member’s behalf by the scheme as long as:

• The liability for the tax year is above £2,000
• The members pensions savings into the pension schemes in total in the same tax year exceeds the annual allowance

If the scheme does pay for:

• A money purchase scheme, they just reduce the member’s fund by the liability
• A defined benefit scheme the adjustment is to the benefits that have been accrued based on the commutation factor of the scheme. i.e. a factor of 12:1 means the member’s benefit will reduce by £1 for every £12 of liability paid.