NHS Pensions – Increased Flexibility Required?

BLOG10th Oct 2019

The maximum allowable pension contribution, or ‘Annual Allowance’ that an individual can make to any pension is £40,000 per tax year. If contributions exceed this limit, HMRC will seek to charge tax at the individuals highest tax rate on the excess.

Introduced in 2016, the Tapered Annual Allowance gradually reduces the £40,000 Annual Allowance to £10,000 for those on high incomes, meaning those individuals are more likely to suffer an Annual Allowance Tax charge on their pension benefits.

The taper means that for every £2 of adjusted income above £150,000 a year, £1 of the Annual Allowance is lost.

The government and the British Medical Association (BMA) both recognised that this was having an impact on many NHS staff, mostly senior doctors, whose earnings mean that their allowance is often tapered below the standard £40,000. This results in a tax charge being suffered as staff are unable to lower the value going into the NHS pension scheme and manage the Annual Allowance tax charge. As a result, a consultation has been launched to gather feedback on new proposals to enable individuals to control their pension growth and any tax charges.


Proposed Changes

In the case where an individual does exceed their annual allowance, the current “Scheme Pays” facility allows the tax charge to be met by the pension scheme by having it deducted (plus interest) from the pension benefits at retirement rather than funding the charge up-front

However, individuals who are high-earners may incur annual allowance tax charges frequently throughout their career and whether they choose to settle any charges through Scheme Pays will depend on a clear understanding of how this compares with the final value of their pension. The consultation seeks to provide greater transparency for members which would involve annual benefit statements showing the Scheme Pays deduction (increasing with interest), comparing this with the accrued pension increases over time. 

Whilst Scheme Pays is an important method for settling tax liabilities, it does not allow high earners to manage their pension accruals in the first place. The main proposal aims to deal with this by offering individuals the flexibility to control the amount of tax-free pension saving without needing to reduce their workload. The operation of this would be achieved as follows:

  • Individuals could choose, before the start of each scheme year (1 April), a personal accrual level and pay lower employee contributions. This would be a percentage of the normal scheme accrual level in 10% increments.
  • Staff could also fine-tune pension growth towards the end of the scheme year by updating their chosen accrual level when they are clearer on total earnings. This would have retrospective effect from the start of the scheme year and contribution arrears would be payable before the end of the scheme year.
  • Where the flexible rates are used, the NHS will also pay lower contributions.

Finally, one-off substantial increases in pensionable pay can create a spike in pension growth and a higher annual allowance tax charge that is not replicated in subsequent years. The NHS Advisory Board has therefore suggested a mechanism to smooth such spikes to reduce, or eliminate, any tax liabilities.

The consultation will close on 1 November 2019. If you have been affected by this, please contact one of our Business Advisory Services team or your usual AAB contact.


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