Understanding the NHS Pension and Annual Allowance – what is new?
In recent years, concerns have arisen regarding the annual allowance and its impact on NHS pension members.
The annual allowance is a limit on the amount of pension savings you can build up in a tax-advantaged pension scheme each year without incurring additional tax charge penalties. In the context of the NHS Pension Scheme, the annual allowance is particularly relevant and sometimes confusing because of the way it is calculated.
The annual allowance was increased from £40,000 to £60,000 from the 2023/24 tax year, but it may be reduced for high earners (classified as such if their income exceeds £200k) due to the ‘tapering’ rules, which can result in an unexpected and substantial tax bill. Contributions that exceed the annual allowance are subject to additional taxation.
Impact on NHS Pension Members
The tapering of the annual allowance affects high earners, including many dentists in the NHS. This has led to concerns about the financial implications of exceeding the annual allowance and the potential to be hit with large tax bills.
The issue is particularly complicated because the NHS Pension Scheme operates on a defined benefit basis, which means that the pension benefit accrued in any given year may not be immediately apparent to members. Contributions are based on a percentage of pensionable earnings, making it difficult for high earners to predict their pension growth and manage their annual allowance effectively.
Annual Allowance Pension Saving Statement
For NHS pension members the annual allowance pension saving statement is usually issued at the beginning of October and this relates to the previous tax year. The NHS BSA should issue statements to individuals, if the combined growth between the 1995/2008 and 2015 scheme exceeds the standard annual allowance.
However, if you contribute to additional pension schemes, you may find it beneficial to request a statement to check your available annual allowance.
Why have I not received my annual allowance statement this year?
Back in 2015, the NHS pension was substantially reformed. Senior members could stay in the ‘legacy’ 1995 or 2008 schemes, whilst younger members moved into the 2015 pension scheme, as we know it today.
The government later lost a court case culminating in the McCloud judgement meaning NHS pensions had to correct those that had been age-discriminated and a rollback method was introduced for those members that were impacted from the 1st April 2015 to 31st March 2022. This roll back includes reviewing the opening values for the pension input for those that are affected by the McCloud judgement.
Therefore, to allow the pension administrators to make the changes, the deadline for issuing the pension saving statements for tax year 2022/23 has been increased to the 6th October 2024, especially for those members reverting to the legacy scheme.
In short, if you have been impacted by the McCloud judgement, you may not receive your statement until 6th October 2024.
Those that have remained in the legacy schemes between the 1st April 2015 and 31st March 2022 and those members that are solely in the 2015 pension scheme, should still be able to request their annual allowance pension saving statement.
What should you do if you’ve exceeded the annual allowance limit?
If you do exceed the annual allowance limit, you do have options. Therefore, it is important to seek advice from your financial advisers and accountants, to discuss your options.
As a rule of thumb, if you have unused available annual allowance from previous years, you’re able to ‘carry forward’ three years unused allowances. If you don’t have any unused available allowance, then you would add the excess amount to your taxable income and pay tax at your marginal rate.
As an alternative, you can opt for ‘scheme pays’, which allows the NHS pension scheme to pay the charge. In retirement you would receive a reduction to your NHS benefits. The best option for some maybe the ‘scheme pays’ regardless of affordability to pay the tax charge immediately.
In summary, the increased annual allowance, may allow some dentists to benefit from increased pension contributions. This is based on our current understanding of the legislation, which can change, especially with the appointment of future governments.
