New rules will make Scheme Pays available to more doctors
For doctors facing a tax charge because they have exceeded their annual allowance, the Scheme Pays facility can be very useful. And now, changes to the rules on how the NHS Pension Scheme in England and Wales operates Scheme Pays will make this facility more widely available.
As this newsletter has explained in the past, Scheme Pays offers doctors the option of sharing the responsibility for paying their annual allowance tax charge with the NHS Pension Scheme. But not everyone liable for the charge has been able to take advantage.
In the past, the NHS Pension Scheme in England and Wales has not accepted Scheme Pays notices from doctors with a charge to pay of £2,000 or less; nor has it accepted notices from doctors affected by the tapered annual allowance where their pension input (the increase in the value of their benefits) for the year in question didn’t exceed the standard annual allowance of £40,000. The Scottish Public Pensions Agency has opted to allow Scheme Pays notices for these doctors affected by the tapered annual allowance from the 2016-17 tax year although the £2,000 minimum charge still applies.
This second exception has proved especially problematic for higher earners in England and Wales affected by the tapered annual allowance, which reduces the standard annual allowance on a sliding scale related to income. However, following campaigning by the BMA, the NHS has now agreed to follow Scotland and change its rules from the 2017-18 tax year onwards.
How the new rules work The NHS Pension Scheme rules in England and Wales have recently been simplified. Since 2015/16 all the NHS Pension Scheme sections under voluntary Scheme Pays allow members to opt for Scheme Pays as an option in the event their total pension input across all schemes exceeds the standard Annual Allowance, currently £40,000 even if input into one of the schemes is less than £40,000. They must however owe more than £2,000. However, pension schemes can also give members the option of Scheme Pays for other circumstances and the NHS Pension Scheme in England and Wales has opted to allow the following from the 2017-18 tax year onwards. Under a voluntary arrangement the NHS now offers Scheme Pays if either:
- Your pension input amount in either the 1995/2008 or the 2015 sections of the NHS Pension Scheme is below the standard annual allowance but over the tapered annual allowance or the alternative annual allowance. The latter is a special allowance starting at £36,000 for members of defined benefit pension schemes such as the NHS Pension Scheme who have triggered the money purchase annual allowance, usually by taking income from a flexi-access drawdown plan or using an uncrystallised funds pension lump sum;
- You’re a member of both schemes and your total pension input is more than your tapered, alternative or standard annual allowance.
- In addition, the NHS Pension Scheme in England and Wales has agreed that from 2017-18 onwards, doctors with an annual allowance charge to pay of £2,000 or less will be allowed to use Scheme Pays.
Who should use Scheme Pays?
Scheme Pays is not for everyone and the decision to opt for NHS Scheme Pays for your tax liability should not be taken lightly. Remember this money is repaid by way of a permanent reduction to your pension and lump sum benefits where applicable in retirement and is irrevocable.
With interest charges, the cost of repaying the money that the NHS Pension Scheme pays upfront to HMRC can be significant, particularly for a young doctor. In England and Wales, interest is charged at a rate of inflation (as measured by the Consumer Prices Index (CPI) plus 2.8%, while in Scotland, it is charged at a rate equivalent to CPI.
On the other hand, it can be a useful option for doctors who do not have the cash to pay the tax bill (though even for these doctors it may be worth looking at other alternatives depending on their personal circumstances). And doctors who are closer to retirement will pay much less interest, or even nothing at all. Finally, for doctors who have (or are likely to) breached the lifetime allowance for pension saving, Scheme Pays could be a way to reduce the value of the pension against this cap.
Given these complications and considerations, it makes sense to take a independent financial advice before deciding whether or not to opt for Scheme Pays.
Beat the HMRC Schemes Pay deadline
There are strict deadlines in place if you want to use the Scheme Pays facility. You must complete a Scheme Pays Election Notice (SPE2) and return the form within the deadline set by HM Revenue & Customs, which is 31 July in the year following the tax year to which the annual allowance charge applies – so 31 July 2019 for the 2017-18 tax year.
If you’re a member of both the 1995/2008 and the 2015 sections of the NHS Pension Scheme and you want both schemes to pay your annual allowance charge, you’ll need to make separate elections on your SPE2 form. You will also need to set out how much of the charge you want each scheme to pay. This means you must complete both part B and part C of the form within the deadline; it’s not possible to ask one scheme to pay the entire charge.
For GPs, where the administration of many tax returns has been delayed, these deadlines may be challenging; it’s possible they will not have received their annual allowance statements before 31 July. If so, make an estimate of your annual allowance charge liability rather than delaying returning the SPE2 form while you’re waiting for the statement. If you miss the HMRC deadline, you won’t be able to use Scheme Pays – and once you’ve filed the form, the NHS Pension Scheme gives you four years, starting from the 31 July following the end of the relevant tax year, to submit a revised election notice.
One other issue is worth bearing in mind: if you intend to retire before the HMRC Scheme Pays deadline, you must get your election form into the NHS Pension Scheme before you crystallise your pension benefits.
With the rules changing in England and Wales, the SPE2 form for elections relating to the 2017-18 tax year onwards needs to be adjusted – the new version will be available soon. And while the changes mean the rules on Scheme Pays are now aligned in England, Wales and Scotland, at the time of writing, Health and Social Care Northern Ireland had yet to confirm whether it is following suit.
Content correct at time of writing and is intended for general information only and should not be construed as advice.