If you owe tax on your on your pension contributions caused by breaching harsh new annual savings limits will the NHS pension scheme still pay your tax charge?
If you breach the annual allowance which restricts the amount that can be saved into a pension while still receiving tax relief to just £40,000 per year, you will be charged tax on the excess savings at your marginal rate of income tax. Normally you have the option of applying for ‘Scheme Pays’ – requesting that the NHS Pension Scheme pays some or all of the tax bill in exchange for reduced future benefits.
Interest accrues on the amount the Scheme paid at the rate of 2.8 per cent each year plus the relevant CPI (consumer price index) rate of inflation. The amount owed will be converted into a reduction of pension and lump sum benefits upon retirement but there can be tax advantages in doing this.
However, since April 2016, there is also a new ‘tapered annual allowance’ for those doctors with adjusted earnings (ie all their NHS and private earnings plus interest from savings plus the actual growth in the pension itself) of over £150,000. This ‘taper’ reduces the permitted pension contributions down on a sliding scale from £40,000 to as little as £10,000 per year.
Unfortunately, the Scheme Pays option may only be applicable to the proportion of tax charges caused by exceeding the standard annual allowance of £40,000, not breaches of the new tapered allowance.
The tapered annual allowance is complex already but the rules surrounding the taper and Scheme Pays will cause a headache for many. If your pensions’ savings exceed both caps – the tapered allowance at whatever rate is relevant to you, plus the standard annual allowance, you could still qualify for Scheme Pays but only on the portion of the excess above £40,000.
To make matters worse, you may not have received your annual pension savings letter from the NHS in time (or at all) so do not have a clear picture of your position. The NHS is only required to issue statements to those breaching the full annual allowance not the tapered limit so you may be entirely unaware of where you stand.
If you believe you may be affected, and most middle to senior doctors will be – do not delay in clarifying your own status. The deadline for Scheme Pays is normally 31 July each year but it can take several months to gain the necessary information from the pension schemes.
To talk to an expert about your own position, please contact us on 020 7636 7006.