Scheme Pays Election for Annual Allowance Charge: 2026/27 Guide & How It Works
If you’re facing an unexpected Annual Allowance tax charge because your pension input was too high you can take some relief knowing you may be able to settle this charge by using funds in your pension scheme.
The Scheme Pays Election lets your pension scheme pay some or all of the tax charge directly to HMRC on your behalf. In return, your future pension benefits are reduced by an equivalent amount (plus interest).
This guide explains exactly how Scheme Pays works for the 2026/27 tax year, the difference between mandatory and voluntary options, key deadlines, and real examples to help you decide what’s best.
What Is the Annual Allowance Charge?
The standard Annual Allowance for 2026/27 is £60,000. This is the maximum growth allowed across all your registered pension schemes in one tax year (including personal contributions, employer contributions, and the increase in value of defined benefit schemes like the NHS Pension) before further considering any eligible carry forward annual allowance.
If you exceed your available annual allowance including carry forward (which can be easily done if the tapered annual allowance applies), you must pay an Annual Allowance charge. This is taxed at your highest marginal rate (up to 45% or more) and is reported on your Self Assessment tax return.
Many high earners discover this charge only after receiving their Pension Savings Statement (usually sent by 6 October following the tax year being reported).
What Is a Scheme Pays Election?
Scheme Pays is a facility that allows your pension pot (the “scheme”) to pay the Annual Allowance tax charge directly to HMRC instead of you paying it personally.
Your pension benefits are then reduced to recover the amount the scheme has paid (plus a recovery charge, typically based on actuarial factors).
This is particularly useful when:
- You don’t have immediate cash available to pay the tax bill or don’t want to suffer the cash-flow impact to your personal finances.
- The charge arises mainly from employer contributions or defined benefit growth (common in the NHS scheme)
Mandatory Scheme Pays vs Voluntary Scheme Pays
There are two types of Scheme Pays:
1. Mandatory Scheme Pays (the scheme must agree if conditions are met)
- The Annual Allowance charge for the tax year must be more than £2,000
- The pension input amount in that specific scheme must exceed the standard £60,000 Annual Allowance (the taper is ignored for this test)
- You must make a formal election by 31 July in the year following the tax year (e.g., for a 2026/27 charge, the deadline is 31 July 2028)
2. Voluntary Scheme Pays
- Available even if the charge is £2,000 or less, or if it only exceeds your tapered allowance (not the full £60,000)
- The scheme is not obliged to offer this — they can refuse
- Many large schemes (including NHS) will still consider it, especially for long-standing members
Real-Life Examples for 2026/27
Example 1: NHS Consultant with Defined Benefit Growth
Dr. Thompson has an adjusted income of £290,000 in 2026/27, triggering a tapered Annual Allowance of £45,000. Her NHS pension growth (pension input amount) is £92,000. This creates an Annual Allowance charge of approximately £21,150 (taxed at her marginal rate).
Because the pension input in the NHS scheme (£92,000) exceeds the standard £60,000, she qualifies for Mandatory Scheme Pays. The NHS scheme pays the £21,150 to HMRC, and her future pension is reduced accordingly. She still reports the full charge on her Self Assessment but pays £0 personally for this part.
Example 2: Company Director with Employer Contributions
Alex (a tech director with RSU vesting) has a total pension input of £78,000 across two schemes. His tapered allowance is £30,000, creating a £18,000 tax charge. Only one scheme exceeds £60,000 input. He can use Mandatory Scheme Pays on that scheme for the portion above £60,000 and request Voluntary Scheme Pays on the other for the rest.
Example 3: Smaller Charge – Voluntary Route
Sarah has a £4,500 charge entirely due to the taper (no single scheme exceeds £60,000). She can ask for Voluntary Scheme Pays. If her provider agrees, she avoids paying cash now, though her pension benefits will still be reduced.
Key Deadlines for 2026/27
- Self Assessment deadline: 31 January 2028 (to report the 2026/27 charge)
- Mandatory Scheme Pays election: 31 July 2028
- Voluntary Scheme Pays: Usually earlier — contact your scheme as soon as you receive your Pension Savings Statement
You must still complete your Self Assessment tax return even if the scheme pays the charge. The return shows the total charge and how much (if any) the scheme has paid.
Important Considerations Before Electing Scheme Pays
- Long-term cost — The reduction in your pension benefits is usually more than the tax saved today because of compound growth and actuarial adjustments.
- Cashflow vs future value — Paying personally may be better if you have the funds and want to preserve your full pension.
- Multiple schemes — You may need to split the charge across schemes.
- NHS & Public Sector schemes — They have specific forms (e.g., SPE2 for NHS) and processes — get specialist help early.
How ESDG Accountancy Can Help
Dealing with an Annual Allowance charge and deciding whether to use Scheme Pays is complex — especially when combined with tapered allowances, carry forward, or multiple pension schemes.
At ESDG Accountancy we specialise in helping high earners, NHS professionals, company directors, contractors, and clients with RSUs manage their pension tax position efficiently and compliantly.
We can:
- Review your Pension Savings Statements and calculate your exact Annual Allowance charge
- Advise whether Mandatory or Voluntary Scheme Pays is the best option for you
- Handle the election process and Self Assessment reporting
- Explore carry forward and other planning strategies to reduce or eliminate future charges
Book a free 15-minute initial tax review today by completing the contact form below. We offer fixed-fee Self Assessment and other tax services.
Contact our team in Blackheath or Greenwich — we’ll take the stress out of your pension tax charge and help you make the right long-term decision.
