NHS scheme pay changes

You may or may not be aware that recently the NHS extended their voluntary scheme pays provision for annual allowance tax charges.  This will be available for tax charges arising in the 2017/18 tax year.

Let’s recap on the current position:

Annual allowance is a maximum contribution (for NHS purposes this is the growth of the fund) to your pensions each year (by you and/or your employer), without incurring a tax charge.   For the 2017/18 tax year (and subsequent tax years) the annual allowance limit is £40,000.

What is tapered Annual allowance:

Since 6 April 2016 the annual allowance limit has been tapered.  So for every £2 over £150,000 of earnings you lose £1 of the annual allowance limit, meaning that any income over £210,000 would only leave you with a £10,000 annual allowance limit.

How is the tax charge for exceeding the annual allowance paid?

If you are a member of the NHS Pension Scheme and have exceeded your annual allowance, you can either:

• Settle the tax charge directly to HMRC (this is normally done through your tax return)
• Apply for the scheme pays facility to cover the resulting tax charge on your behalf

How does scheme pays work?

If you decide that the NHS pension should pay an amount of your annual allowance tax charge, this will be recorded on your pension record as a ‘notional negative defined contribution (DC) account’. This is similar to the NHS Pension Scheme providing you with a loan to cover the annual allowance tax charge, which you pay back, with interest, when you retire or transfer out of the scheme. When you retire, the amount you owe will be deducted from your NHS pension benefits.

Mandatory and voluntary scheme pays

Mandatory scheme pays can be used to cover annual allowance tax charges (in relation to input amounts above the standard annual allowance) in the 1995/2008 or 2015 NHS Pension Scheme if:

• The pension input amount exceeded the standard annual allowance (i.e. the £40,000 limit); and
• The annual allowance charge for the tax year in question was more than £2,000 across all pension schemes
• Pension schemes can choose whether to extend the scheme pays facility to their members where the mandatory conditions are not met. This is known as voluntary scheme pays.

For the 2017/2018 tax year onwards, the NHS Pension Scheme has extended availability of voluntary scheme pays to remove the £2,000 threshold, and extended availability to:

• Members for whom the pension input amount in the 1995/2008 or 2015 NHS Pension Schemes is more than their tapered or alternative annual allowance, or
• Members for whom the total pension input in both the 1995/2008 and 2015 NHS Pension Schemes is more than the standard, tapered or alternative annual allowance.

Members of the NHS scheme should be aware that when asking for scheme pays, they will remain solely liable for their annual allowance charge until it is paid by NHS.

Applying for scheme pays:

If you would like to use scheme pays you need to apply to the NHS Pension Scheme by completing a scheme pays election notice (the form for voluntary scheme pays is currently being updated). The deadline for the NHS Pension Scheme to receive this by is 31 July (following the January in which the charge must be declared on your tax return)

You’ll need to submit an election earlier if, before this deadline, you retire or reach 75 years of age.

Under the mandatory scheme pays facility the NHS Pension Scheme has joint liability for making the tax payment to HMRC, any interest, and associated penalties due should the payment be made after the self-assessment tax return deadline of 31 January. Under voluntary scheme pays, you are solely responsible for the payments.

Summary:

The critical part in which route you take is down to your individual circumstances.  In all instances I would recommend seeking tax and financial advice.  The impact of using scheme pay even just for one year could impact on what you will eventually receive in benefits as it is not just the tax bill that will be paid, there will also be interest added which is set at consumer price index (CPI) plus 2.8%.

For those that are part of NHS Scotland, these rules came into force in 2016-17 and an added benefit is that you do not pay any interest.

Contact Phil Jackson for further help and advice.

Source: https://www.ftadviser.com/pensions/2018/10/11/doctors-can-pay-tax-charges-through-pension/

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