Avoiding a nasty pensions tax charge
Jenny Stone, RBP medical accountants
You might need no reminder that 31 July is the deadline for making an election for the NHS Pension Agency (NHSPA) to pay any tax in respect of an annual allowance tax charge for 2017/18.
The high tax charges relating to the NHSPA have hit the headlines recently. But there are still many doctors who don’t fully understand what this means for them. What this does mean, though, is that they can end up having a large tax liability, which they have to pay due to missing the scheme pays deadline.
A scheme pays election is a request to the NHS Pension Agency to pay the pensions tax charge.The reason for this is GPs annual pension certificates for 2017/18 are not submitted until February 2019 and Primary Care Support England - run by Capita - have to process these and then pass the information to the NHSPA.
What is the annual allowance?
The annual allowance is the amount you can contribute to a pension and receive tax relief on. The standard annual allowance is £40,000, although this is reduced on a tapering basis for individuals with adjusted income over £150,000, down to a minimum of £10,000. If you contribute more than your annual allowance, you have a tax charge to pay on the excess. Unfortunately, members of the NHS Pension Scheme cannot choose how much they pay into the scheme, meaning many high earning doctors are left with a large tax liability as a result of exceeding the annual allowance.
How is the annual allowance calculated for members of the NHS Pension Scheme?
As the NHS Pension Scheme is a defined benefit scheme, you ignore what you pay in contributions and instead have to calculate a ‘deemed’ growth in your pension over the year. Your pension grows by contributing for another year and 'dynamisation' (revaluation based on inflation) that is applied to your opening pension fund.
In 2017/18, members of the NHS Pension Scheme saw their pensions grow by 4.8%, which resulted in a larger than normal ‘deemed’ growth for annual allowance purposes meaning more individuals had a tax charge.
How do I know if I am subject to the tapered annual allowance?
If your threshold income (taxable income) is more than £110,000 and your ‘adjusted income’ (see below) is more than £150,000, the standard annual allowance will be tapered down by £1 for every £2 that your adjusted income is over £150,000. The minimum reduced annual allowance is £10,000.
‘Adjusted income’ is calculated by adding your ‘deemed’ growth in your pension to your taxable income. Therefore other sources of income such as property income, dividends, bank interest will be included when calculating whether you are subject to the tapered annual allowance.
How is the tax charge calculated?
If the pension growth is more than the available annual allowance, the excess growth will need to be included on your self assessment tax return and tax will be payable at your highest rate. The available annual allowance is either the standard £40,000 or tapered amount plus any ‘unused allowance’ (see below) carried forward from the previous three years.
If in the previous three years your ’deemed’ growth is less than your annual allowance the difference can be carried forward to the next year.
If your ‘deemed growth’ for 2017/18 was £60,000 and you were subject to the maximum taper, so your annual allowance is reduced from £40,000 to £10,000, tax would be payable on the excess of £50,000 (£60,000 minus £10,000) and if your highest rate was 45% this would be a tax charge of £22,500.
What are the options for paying the annual allowance tax charge?
The tax charge will need to be included on your tax return. This can be paid personally and a tax charge in respect of 2017/18 was payable by 31 January 2019. Alternatively, you can elect for the NHS Pension Agency to pay the tax charge and the deadline for making a scheme pay election for 2017/18 is 31 July 2019.
How do I know if I have a tax charge?
The NHSPA will send an annual allowance savings statement to members of the NHS Pension Scheme whose growth is over the standard annual allowance. However, for GPs, the annual allowance savings statement for 2017/18 will not be available until September 2019 at the earliest, which is after the deadline for the scheme pays election.
Although an annual allowance savings statement should be available to hospitals consultants before the scheme pays deadline we have many consultants who do not receive their statement until much later, meaning if they have a tax charge they may have to pay this personally if they miss the scheme pays deadline.
Therefore it is extremely important that your accountant is calculating an estimate of your annual allowance tax charge when they are completing your tax return to ensure you have plenty of time to make a scheme pays election.
Who is affected?
Individuals whose taxable income is over £110,000 are likely to be affected as they could be subject to the tapered annual allowance. Older members whose income may be below £110,000 could still be affected, as they will have large pension pots. Hospital consultants who have had pay increases or clinical excellence awards will be affected.
What should I do if I think I may be affected and my accountant has not made an estimate?
If you’re worried that you may be affected and have a tax charge in respect of 2017/18 and want to elect for the scheme to pay the tax, you can make a provisional scheme pays election using estimates to the NHS pension agency by 31st July 2019. You should then request an annual allowance savings statement and you have four years after submitting a provisional scheme pays election to amend it.
What will happen to my pension if I elect for the Scheme to pay the tax charge?
Asking the NHS pension agency to pay the tax charge will reduce your overall pension benefits. The NHSPA are making a loan to you, so interest will be added to the tax charge and this will be recovered when you take your pension benefits.
Jenny Stone is a partner at RBP, a specialist medical accountants company