How to deal with annual allowance tax charges from 2019-20

If you’re facing a tax charge related to your pension savings in the 2019-20 tax year, make sure you claim compensation you may be due to cover this cost.

Doctors have been front and centre in the row over pension tax rules. In recent years, many clinicians have fallen foul of the annual and tapered annual allowance that sets limits on tax-free pension savings, finding themselves facing a tax charge because the growth of their NHS Pension Scheme benefits over the course of the tax year took them above this limit. And while the level of the threshold income have now changed, it is important to manage any historic liabilities you may face.

Following extensive BMA lobbying, changes announced in last year’s Budget will mean most doctors who previously suffered large tax bills due to the tapering of their annual allowance are, from the current tax year onwards, no longer affected by tapering. However, despite these changes, doctors may still face annual allowance bills as a result of exceeding the standard annual allowance. However, the old rules remain in place for 2019-20 tax year and many doctors will be affected by tapering. Fortunately, help is available for doctors in England and Wales, but the key deadlines for dealing with this issue are approaching quickly.

NHS England and Wales Annual Allowance Compensation Scheme 2019-20

Crucially, well before last year’s budget changes, policymakers recognised that the pension tax issue was having a significant adverse effect on frontline services. For example, many doctors were keen to work additional hours to support patients but were unable to do so because their extra earnings would generate a tax liability, leaving them financially worse off.

For this reason, following lobbying from the BMA, NHS England and NHS Improvement (NHSEI) announced a new policy for the 2019-20 tax year, to compensate doctors in England for this tax liability, with NHS Wales adopting a similar policy. In order to comply with tax legislation, the tax charge could not be paid directly to HMRC so there is two-stage process:

  • First, eligible clinicians. i.e those who are members of the NHS Pension Scheme and who face a tax charge in respect of their NHS pension benefits above their available annual allowance during the 2019-20 tax year, must ask the NHS pension scheme to pay the tax charge, which in effect generates a loan against your pension savings. This can be done under the existing “Scheme Pays” rules and means doctors will not have to pay any tax charges today from their own pockets. In order to access the compensation, doctors must not pay the tax charge themselves.
  • Second, the NHS has made a contractually binding commitment to compensate doctors at the time of retirement. The value of the scheme pays loan is deducted from the value of your notional pension pot at the time of retirement. Normally, this would reduce any pension and potentially any lump sum that you would receive but for 2019-20, the NHS is promising to fully compensate doctors for these deductions, via an additional payment made alongside their pensions.

Importantly, these arrangements are guaranteed by NHSEI and the Secretary of State for Health and Social Care. They will be administered by the NHS Business Services Authority (NHSBSA), independently of the NHS Pension Scheme.

What do you need to do?

If you need to take advantage of this policy, it is important to take action in good time. The first important deadline is 31 January 2021. This is the date by which you must file your self-assessment tax return for the 2019-20 tax year; on this form, you need to indicate that you intend to pay your annual allowance tax charge via the Scheme Pays facility. The good news is that this deadline has been extended to 28th February however although you will not be subject to a fine interest could still be charged for late payment of tax.

The next step is to complete a Scheme Pays form, which is how you make a formal request to use the facility. This must be filed to the NHSBSA by 31 July 2021.

Once you have completed this form, the process varies slightly, according to whether you work in primary or secondary care.

  • If you are in primary care, download the compensation policy application form from Primary Care Support England will endorse your application and is working with NHS England on the final process through which forms will be uploaded. In the meantime, the British Medical Association has issued guidance and a template letter that you can submit alongside your Scheme Pays election form from
  • If you work in secondary care, download the compensation application form from the same source and complete your part of the document. You will then need to ask your employer to endorse the form by confirming that you worked for the organisation in a clinical role during the 2019-20 tax year and that you had a valid clinical registration at the time. Your employer should return the form to you so that you can send it to NHSBSA along with your Scheme Pays form.

Once the paperwork is complete, you will receive compensation payments automatically once you retire and begin claiming your NHS pension. The payments will be made monthly into the same bank account as your pension and you will receive an annual statement detailing what you will receive over the following year. For anyone retiring before April 2021, payments will be backdated.

Remember, this system applies only to doctors in England and Wales.

In Scotland, the Recycling Employers Contribution policy was introduced for eligible clinicians for the 2019-20 tax year, though this was a temporary measure and has not been replaced by other arrangements. Unfortunately, despite BMA lobbying, no arrangements have been made for clinicians in Northern Ireland.

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

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