NHS Pension Scheme: Annual Allowance Tax Charge

During September this year the NHS Pension Department issued a letter to those who have been affected by the pension annual allowance and may suffer a tax charge.

This letter should not to be ignored and pushed under the sofa; the taxman is lining up for his wedge and you need know that there may be a choice over who can pay the tax charge.

It may be also be possible to mitigate the tax charge by using unused pension relief from previous years.

Why do I have a Tax Charge?

UK law states that we (the worker) can pay up to 100% of our earned income (up to max. of £40,000)  into a pension scheme each tax year.

Your employer, in this case the NHS, can increase benefits up to £40,000 into a pension scheme in any one tax year.  With an overall maximum from both you and the employer of £40,000.

If you exceed this maximum limit of £40,000.  There will be an “Annual Allowance Tax Charge”

The amount above the £40,000 is added to your UK earned income and taxed at your marginal rate. Therefore, if you find you and your employer have benefit growth of £50,000 for the tax year 2017/18 you are above the limit by £10,000.

If you are a 20% tax payer your tax charge will be £2,000

If you are a 40% tax payer your tax charge will be £4,000

If you are a 45% tax payer your tax charge will be £4,500

So what can you do about this tax charge?

It maybe that you did not use all your allowance last tax year, therefore, you may be able to ‘Carry Forward’ any used annual allowance.

For example:

2016/17 = You used up £25,000 of your £40,000 limit

This means you can “Carry Forward” £15,000 of unused allowance from 2016/17

This will increase your 2017/18 annual allowance from £40,000 to £55,000

The NHS Pension Department will not work this out for you, but they will provide you with the data to enable you to work it out. We call this “Carry Forward of Unused Relief”.

Note: You can “Carry Forward Unused Relief” for the previous three tax years.

I have used up all of my “Unused Relief” – what do I do?

If you have used up all of your “Carry Forward” from previous tax years and have still exceeded the limit for the tax year 2017/18 you will need to decide how to pay the tax bill.

  • If your earned income from all sources* is below £110,000 for the year it may be possible for the NHS pension scheme to pay the tax bill for you. To do this you’d need to elect ‘Scheme Pays’. There is a deadline for making the election. Of course, this does mean there will be a reduction in your NHS pension benefits when they come into payment.
  • Alternatively, you can pay the tax bill yourself from your savings.
  • If your income from all sources* is above £110,000 and your earned income from all sources* plus your employer’s benefit growth is above £150,000 you will be subject to the “Tapered Annual Allowance”. If this is the case the NHS Pension Scheme will NOT pay the tax bill for you and you must pay the tax bill out of your savings.

*Income from all sources includes; earned income, investment income, rental income etc.

If you’ve received a letter from your pension provider about the annual allowance suggesting that you may suffer a tax charge, we recommend you seek Independent Financial Advice.

We would be happy to advise on NHS Pension Scheme Annual Allowance Tax Charge and any other defined benefit schemes with similar issues.