The introduction of the tapered pension annual allowance from 6 April 2016 has been a contentious issue for many, in particular senior NHS staff members.
The legislation change means that, for high income individuals, the annual pension allowance may be reduced from £40,000 to a minimum of £10,000. Pension inputs in excess of the annual allowance continue to be taxable at marginal income tax rates however; the tapering has meant a significantly higher number of individuals are falling fowl of the excess charge.
This change has disproportionately affected NHS staff members as the NHS offer a defined benefit pension scheme. Broadly speaking, this calculates annual pension input by reference to the growth in the pension pot, which is affected by pensionable pay.
The only option to control the growth in NHS pension pots is therefore to reduce pensionable earnings for the year, meaning many are opting not to take on any additional shifts, in an effort to avoid the huge tax charges that are hitting them.
Since the introduction of the tapering, the only attempt made to help those effected by an excess charge has been for the ‘scheme pays’ facility to be extended to cover the whole tax liability arising (previously this was restricted to only cover certain circumstances). The downside of the scheme pays facility however, is that it reduces the overall value of an individual’s pension pot on retirement and is therefore not a simple fix.
Looking to the future
In the long term, the Treasury are consulting on ways to amend the current annual allowance legislation to help mitigate the somewhat unintended effects of the tapering. This will be good news for not just NHS staff but also other higher earners.
They are expecting to announce the outcome of the current consultation document following the 11 March budget, but have confirmed that any changes will not take effect from the 2019/20 tax year.
NHS England has therefore stepped in as a short term measure for those affected by the charge in 2019/20.
For those members who opt for ‘scheme pays’ in 2019/20, the NHS have agreed to make an additional payment into the member’s pension pot on retirement, equal to the value paid out for the tax charge in 2019/20, to avoid any loss to the individual.
There are however a number of caveats. For example, the offer applies to NHS scheme charges only, ignoring all pensions held outside of the NHS, and is also not available to cover any excess arising from Additional Voluntary Contributions (AVC’s) made.
It is therefore worth contacting your accountant and/or financial advisors to ensure you are making the most of the available help in 2019/20.
If you would like to discuss the above with us in more detail, please contact us.
*Details of the calculation required to determine if you are a high income individual are not included above however these are available on the gov website here: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance