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Could NHS Pensions help you manage an annual allowance charge?

The Scheme Pays facility enables doctors to arrange for NHS Pensions to pay the annual allowance tax charge on their behalf, with the money repaid through a reduction in their benefits. Is this a good option for you?

Doctors whose NHS Pension Scheme benefits grow by more than a certain amount over the course of a full tax year may have to pay an HM Revenue & Customs charge on the excess. But if you’re affected by this rule, check whether NHS Pensions will pay the charge on your behalf, until you retire– and whether this makes sense for your circumstances.

Such charges could be due if your NHS Pension Scheme benefits grow by more than the annual allowance set by the Government; this currently stands at £40,000 for most people, though those with higher levels of taxable income get a smaller allowance, which tapers down to as little as £10,000. If you’ve gone over your allowance, there may be ways to manage your liability – for example, you could bring forward unused allowance from up to three previous years – but you could still be liable for an annual allowance charge.

If so, you are responsible for ensuring the charge is paid. But that does not have to mean writing a cheque yourself – under the “Scheme Pays” rules, you may be able to ask NHS Pensions to pay what you owe.

It’s important to understand that this is a loan rather than a new benefit. Where NHS Pensions pays your annual allowance charge, it will recoup the money, with interest, from your pension benefits when you retire. Nevertheless, Scheme Pays can be a useful way to manage your liability, especially where you don’t have the necessary liquid funds to pay the bill.

Still, there are certain conditions you will need to meet for Scheme Pays to be a possibility. First, the annual allowance tax charge that you owe must be more than £2,000. And second, you must submit a Scheme Pays election notice to NHS Pensions by HMRC’s Scheme Pays deadline – this is usually 31 July in the year following the year to which the annual allowance charge relates; so 31 July 2019 for the 2017-18 financial year, for example. You must meet this deadline even if you don’t have final details of your charge; if that’s the case, make an estimate, which can be updated with a new election once you receive your pension savings statement from NHS Pensions.

Different occupational pension schemes operate Scheme Pays in slightly different ways, but NHS Pensions will accept election notices on two different bases:

  1. the scheme is legally required to accept your notice if your pension growth in any one of the NHS scheme sections exceeds the standard annual allowance;
  2. the scheme has also chosen to accept notices from transition members whose pension growth from the 1995 or 2008 section, plus their growth from the 2015 section, comes to more than the annual allowance.

Schemes don’t have to pay the annual allowance charges of those with higher taxable incomes who are affected by the tapered annual allowance, and will only pay the tax due on any excess growth over £40,000 for the tax year in question. The NHS Pension Scheme doesn’t accept Scheme Pays notices from such members, though the Scottish Public Pensions Agency will do so on a voluntary basis.

Does Scheme Pays make sense for me?

Should you opt for Scheme Pays if doing so is a possibility? Well, there are pros and cons to this approach.

The big advantage of Scheme Pays is that you don’t need to find money to pay the tax charge upfront. On the downside, this will mean receiving reduced benefits when you retire, potentially affecting both your annual pension and lump sum (if you receive one), since this is how NHS Pensions recovers the cost of your annual allowance charge. The reduction is calculated using a formula set by the scheme actuary but will include interest, charged at a rate of the consumer prices index measure of inflation plus 2.8  %. In Scotland the accrued interest chargeable is calculated using a different method, charged at a rate of consumer prices index measure of inflation. Whilst the methodology is different the financial outcome is widely similar. This rate of interest begins accruing from 1 January following receipt of your election notice.

Bear in mind, however, that reduced benefits could actually be useful if you’re running into difficulties with the lifetime allowance, which puts a maximum on the total value of benefits you can accumulate before retirement without suffering a tax charge. This is because the Scheme Pays deduction is made before the lifetime allowance calculation is completed, thus reducing the overall capital value of your pension. It’s also important to understand that dependants’ benefits aren’t affected; if you die before retirement, the amount owing is written off, while after retirement, your dependants’ benefits will be based on your NHS pension benefits before any Scheme Pays reduction is taken into account.

The decision doesn’t have to be either/or. You are allowed to ask NHS Pensions to pay some of your annual allowance charge; you can then settle the rest of the bill personally.

Finally, if you do decide to use Scheme Pays, you will still need to declare your annual allowance charge on your tax return when you submit the form under self assessment (deadline 31 January following the end of the tax year to which the charge relates). The form includes a box you can tick to say that you’ve elected to use Scheme Pays.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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