Tax is always a point of conversation at the start of the year – particularly in our line of work – but this year medical professionals will be forgiven for being even more confused by the tax due on their pension savings.
The annual allowance limits the amount which can be saved into a pension each year while still receiving tax relief to just £40,000. 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. This will affect many mid-career and high achieving doctors.
Excess pension savings above the annual allowance rate which is applicable to you will generate a tax charge set at your marginal rate of income tax. If this is the case, you can normally apply for ‘Scheme Pays’ – requesting that the NHS Pension Scheme pays some or all of your tax bill in exchange for reduced future benefits.
You will accrue interest on the amount paid at the rate of 3 per cent each year plus the relevant CPI (consumer price index) rate of inflation. The amount you owe will be converted into a reduction of pension and lump sum benefits upon retirement but there can be tax advantages in doing this.
However, most doctors are unaware that you can only apply for Scheme Pays to pay tax charges caused by exceeding the standard annual allowance of £40,000, not breaches of the new tapered allowance which could be as low as £10,000. If your savings exceed both caps, you could still qualify for Scheme Pays but only on the portion above £40,000.
The situation is made even more complicated because you may not have received your annual pensions savings letter from the NHS in time (or at all) so do not have a clear picture of your position. And calculating your annual allowance is a minefield best left to experts.
Again, the NHS is only required to issue statements to those breaching the full annual allowance not the tapered limit. NHS issues such statements in the autumn – long after the relevant tax year has closed and after the deadline for Scheme Pays (normally 31 July) has passed.
To get an accurate assessment of your situation in time to carefully consider your options and potentially mitigate your liabilities, be sure to seek help from a financial adviser that has a detailed understanding of the NHS Pension schemes and that can undertake work on a fee basis to ensure objective guidance.