Avoid paying the annual allowance charge which could be an additional 45%.
What is the annual allowance?
The annual allowance is the amount of pension savings an individual can make in one year before receiving a tax charge. The standard annual allowance limit has been set at £40,000 since 6 April 2014. Employees may be subject to a lower tapered annual allowance, depending on their taxable income.
If an individual’s pension savings are more than the annual allowance (in one scheme year), they will receive a tax charge on the additional amount. The tax rate charged will reflect the individual’s marginal tax rate .i.e. 20%, 40% or 45%
To calculate the annual allowance position, you will need to know your pension input amount from the 1995 scheme, 2015 scheme or both depending what scheme you are in.
Remember the NHS is a final salary pension and your pension input is not the figure you contribute but the amount your pension has grown by.
You can request an “Annual Allowance Pension Saving Statement” to get these figures for all your schemes.
If you also contribute into a private pension these contributions will also have to be taken into account when performing the calculation
The Tapered Annual Allowance (TAA)
The Tapered Annual Allowance (TAA) came into force as of 6 April 2016 for high earners. For every £2 of ‘adjusted income’ above £150,000 p.a. £1 of annual allowance will be lost. The maximum reduction was £30,000 meaning that anyone earning over £210,000 had their annual allowance capped at £10,000.
If you have earnings below £110,000 p.a. (post-pension contributions known as ‘threshold income’) you will not be affected by the TAA. From the 2020/21 tax year, the £110,000 limit is being raised to £200,000.
From the 2020/21 tax year the £150,000 limit is being raised to £240,000, and Annual Allowance is reduced to £4,000 when your income is £312,000 or more.
What is scheme pays?
Scheme pays allows members to ask the NHS Pension Scheme to pay their annual allowance tax charge to HMRC on their behalf. In return, the member’s benefits in retirement are reduced by a corresponding amount. Scheme pays may be attractive to staff who don’t have the funds available to pay their annual allowance tax charge upfront.
Scheme pays is available to all members of the scheme who breach the annual allowance and incur a tax charge, including:
- high earners who are subject to a lower, tapered annual allowance
- employees who incur a tax charge below £2,000.
Employees must notify NHS Pensions of their intention to use scheme pays before the relevant annual deadline for each tax year:
|2018/2019||31 March 2021 *|
|2019/2020||31 July 2021|
|2020/2021||31 July 2022|
|2021/2022||31 July 2023|
What do I need to calculate my lifetime allowance position?
- Annual Allowance Pension Savings Statement for both 1995 & 2015 scheme – this can be done by contacting NHS Pensions via phone – 0300 330 1346 or email – email@example.com
- Confirmation of personal contributions into a private pension scheme (if applicable)
- Total Rewards Statement – https://www.totalrewardstatements.nhs.uk/
- Copies of your P60’s, Month 12 payslips, P11D’s and details of any other income (rent, interest, private etc.) for 2016/17, 2017/18 & 2018/19 tax years. Or copies of tax returns
NHS Pension future tax years
- For tax year 2019/20, the NHS have confirmed they will pay all tax charges for members via the scheme pays method, by not reducing their pension as a result
- For tax year 2020/21, the adjust and threshold income amount have been increased, meaning members are less likely to be subject to the tapered annual allowance i.e. have the full £40,000 allowance.
Calculating these figures is far from straightforward.
To help NHS staff, we have teamed up with a financial advisory firm with experience of carrying out the calculations to offer a free consultation to help work out if the Annual Allowance has been breached.
Fill in the form to claim your free consultation.