Annual allowance tax charges and COVID-19 in the NHS Pension Scheme
Due to the current situation with COVID-19, we have seen a number of our clients opting back in to the NHS Pension Scheme. This is primarily because there are enhanced death in service benefits that active members receive, morbid as it may sound, and also the budget changes which mean that most people can be in the scheme, if not for a full year for a few months, without incurring significant annual allowance charges.
The vast majority of consultants and GPs will already be fully aware of the annual allowance tax charge which has become far more prevalent and punitive since the 2016/17 tax year, when the tapering rules were first introduced.
The tapering rules meant that anyone with taxable income in excess of £110,000 could be subject to a reduction in their available allowance. It’s necessary to assess earlier years in order to calculate whether you have any unused allowances available to carry forward. Unused allowances can be carried forward for up to three years. However, the tapering rules have now been in place for four years, so if you are a high earner and an active member of a pension scheme, the likelihood is that you will have minimal or no unused allowances available to carry forward.
This legislation has caused a lot of concern within the medical profession for several reasons. One being that as the NHS Pension Scheme is a defined benefit scheme it’s not possible to control how much your pension grows by each year. It is linked to your pensionable pay figure, which you have no/very limited control over. Furthermore, the calculations to work out the pension input amount each year are complicated. Each of the three NHS Pension Schemes have different rules, and the earlier schemes are also different if you are a consultant or a practitioner. The calculations are extremely complicated, and you cannot rely on NHS Pensions to provide you with the information in time for your tax return, nor that the information they provide is 100% accurate.
Changes were introduced in December 2019 to the annual allowance tax charge. NHS England announced that any annual allowance charges for 2019/20 could be paid by the NHS Pension Scheme and the NHS employer will make a contractually binding commitment to pay the individual a corresponding amount upon retirement to ensure that they are fully compensated for the impact of the scheme pays election on the pension benefits. A short-term fix for a long term problem, with a promise that changes would be made when the budget was announced.
Indeed, when the budget was announced in March, changes to the annual allowance legislation were announced. The tapering thresholds were increased. The initial threshold increased from £110,000 to £200,000 and the adjusted income threshold increased from £150,000 to £240,000. The minimum annual allowance was, however, reduced down to £4,000.
Whilst this is a big change and means that the vast majority of individuals will no longer be affected by the tapering rules, it doesn’t mean that annual allowance charges cannot still apply. A highly paid individual may still achieve growth in excess of a full £40,000 allowance, resulting in a tax charge, even without tapering of the allowance.