The standard pension Annual Allowance is £40,000 for those with adjusted net income of less than £200,000 (although this can be tapered to as little as £4,000 for higher earners). When considering the Annual Allowance for the NHS Pension scheme it is deemed contributions rather than actual contributions which need to be considered.
Should the deemed contributions (a multiple of the growth in the pension) for the year together with any actual personal pension contributions exceed the annual allowance a tax charge will arise. However, any unused relief for the previous three years can be used to reduce or remove the tax charge.
In previous years particularly for 2020/21, when the threshold at which the Annual Allowance is tapered was increased, only a few doctors would have a pensions tax charge and even if so most would be relatively small charges.
However, the recent rapid increase in inflation figures will mean that far more doctors will be liable to additional Pensions tax charges. This is a result of the difference in the inflation rates used for calculating the pension and those allowed by HMRC. It is therefore possible that the growth in the pension alone would be sufficient to exceed the annual allowance before any earnings for the year are taken into account.
It is likely that a large number of doctors will have potentially significant pension tax charges for 2021/22 although many will have unused relief brought forward to offset this. However, for 2022/23 the deemed growth is likely to be even higher and all of the unused relief is likely to have been utilised in the previous year so we anticipate large tax charges will arise.
If there is a tax charge then this will be payable on the 31 January following the relevant tax year. For some medical professionals such as GPs this means it will be due before actual figures are received from NHS Pensions so estimates will be necessary. Hopefully for salaried doctors and consultants the figures will be known but this cannot be guaranteed.
As an alternative to paying these charges personally, a scheme pays election can be made for the tax to be paid out of the NHS Pension, by doing so the tax due will not have to be paid by the GP with the ordinary tax liability but the ultimate pension benefits will be reduced. We recommend that you should therefore consult with an IFA on whether a scheme pays election is appropriate in your circumstances. The scheme pays election must be submitted by the 31 July in the year following the year in question, for example for 2021/22 the deadline is 31 July 2023.
There may be potential ways to reduce the tax charge such as by opting out of the NHS Pension for a period, however, this is a very specialist and regularised area so you would need to consult with an IFA who specialises in the NHS Pension Scheme and qualified to give advice on opting out before you take any action.
If inflation starts to reduce as is forecast, then for 2023/24 it could be that deemed contributions will be much lower so there will be less chance of a tax charge arising and potentially unused relief available to carry forward. Unfortunately carrying back of this relief is not allowed and the Government has rejected the possibility of this being a temporary solution to the inflationary problem.
It should be noted that it is not all bad news as the reason for a potential tax charge is because the final pension will have increased but having a large tax charge arising is clearly not ideal, so you may choose to take advice now.
Please get in touch if you need our help in calculating or estimating potential charges but as noted above you should contact an IFA who specialises in the NHS Pension Scheme before taking action to try and mitigate these charges.
Terry Bentley-Darby is a Senior Tax Manager – please contact him for more information by emailing terry.bentley-darby@randall-payne.co.uk or call 01242 776000.
Our specialist medical division is led by Simon Dudfield. Simon and his team have a wealth of experience in advising medical practices, GPs and consultants. You can take advantage of our expertise including a full range of accounting, taxation and business advisory services designed specifically for medical practices and practitioners. We are members of the Association of Independent Specialist Medical Accountants, AISMA.
