The deadline to elect for NHS Pensions’ Scheme Pays is only a few weeks away. If you miss it, you could face a tax penalty that will shortly need paying. “The deadline for what?” I hear you ask.
It all relates to your annual pension allowance
We are seeing more and more people fall foul of their annual pension allowance limit. This is the amount that you can contribute to a pension environment without incurring a tax charge.
For NHS Pension Scheme members, your annual pension allowance is based on what you are deemed to have contributed, not what you have actually contributed. Calculating your annual pension allowance >
The increasing “you’ve gone over your annual allowance” trend is also likely to be further exacerbated by the new tapered annual allowance rules which came into effect in April 2016.
If you breach your annual allowance limit, you may well be stung with an unexpected additional tax bill.
Timing is key to maximise your options
Many General Dental and Medical Practitioners often experience a long delay between the time they finalise their accounts, and the time the NHS Pensions Agency sends them the information that they need to work out whether or not they have breached their annual allowance.
It means that you can be blissfully unaware that you’ve gone over your annual allowance until long after the event, and certainly after the election deadline for Scheme Pays.
What exactly is Scheme Pays?
In effect, Scheme Pays is a system whereby the NHS loans you the money to pay the additional tax bill that you have incurred for breaching your annual allowance. They recoup their ‘loan’ (plus the interest) by reducing your NHS Pension when you come to draw it.
If you want to opt for the NHS Pension Scheme paying your tax liability, as opposed to you paying it yourself, you must let the NHS Pensions Agency know by the 31st July of the following year.
By that I mean the NHS Pensions Agency must receive your election by the 31st July; it is not enough just to send the election by the deadline. The table below shows the deadline for each tax year. You may need to scroll left and right if you’re viewing the table below on a small screen.
|2015/2016||31 July 2017|
|2016/2017||31 July 2018|
|2017/2018||31 July 2019|
|2018/2019||31 July 2020|
Scheme Pays vs you paying your annual allowance tax charge
Paying your tax bill now for exceeding your annual allowance versus going the NHS Pensions’ Scheme Pays route is a very personal decision. There are merits to both options which are best discussed with your financial adviser and accountant based on your own individual circumstances.
Electing for Scheme Pays: What you need to do
The NHS Pensions Agency suggest that anyone with a history of annual allowance issues elects for Scheme Pays by completing the Annual Allowance Scheme Pays Election Notice form.
This form asks that you enter the amount by which you have exceeded your annual allowance for the given tax year. Because there are numerous factors that influence how much your annual allowance actually is, working out how much you have exceeded it by is difficult to predict.
If you have done the maths and are still unsure whether or not you have exceeded your annual allowance limit, you should consider electing for Scheme Pays to be on the safe side. You can state on the form that your figures are an estimate.
If you have exceeded your annual allowance and your tax liability for doing this is anything less than £2,000, you are not eligible for Scheme Pays; you will have to pay your additional tax bill yourself.
What if you miss the 31st July Scheme Pays deadline?
If you don’t make your Scheme Pays election by the relevant 31st July deadline, you are likely to have to pay your annual allowance tax liability in the appropriate time scale for that tax year.
In essence, Scheme Pays will theoretically no longer be available to you for that tax year. I say theoretically because you are ultimately at the discretion of the NHS Pension Scheme, and we are aware that they have been helpful in cases where the individual has not elected for Scheme Pays.
“I elected for Scheme Pays last year so I don’t have to elect again this year, right?”
Wrong! Electing for Scheme Pays has to be done each year. Your decision and financial situation are likely to change from one year to the next so the option you chose last year may not be the best option for you this year.
More information on Scheme Pays can be found on the NHS website and of course, it goes without saying, it’s well worth going through the details and your options with your accountant and/or financial adviser.
Protecting your pension with Individual or Fixed Protection 2016
In April 2016, the amount that you can save into pensions over your lifetime reduced from £1.25m to £1m. Simultaneously, the Government put in place two ‘transitional regimes’ that allowed doctors and dentists to protect their hard-earned pension savings: Individual Protection 2016 (IP16) and Fixed Protection 2016.
To apply for the relevant protection you need certain figures, including the 5th April 2016 valuation of your NHS Pension. For GMPs and GDPs, this figure was not due to be available from your online NHS Total Reward Statement until later this year.
However, the latest reports from the NHS indicate that GDPs can now apply for their updated pension valuation. GMPs though need to wait until May 2018.
Will you be electing for Scheme Pays this year? Let us know by adding a comment below.
Legal & Medical Investments Ltd is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate tax advice. The tax reliefs referred to are those currently applying in the United Kingdom to UK Tax Residents. These tax reliefs are liable to change. The value of any tax relief available will depend upon the individual circumstances of the taxpayer.