Before our minds focus on enjoying the summer, there is an important NHS pension deadline fast approaching, a deadline many doctors and dentists will need to turn their attention to as it affects annual allowance charges and the ability to utilise NHS Scheme Pays.
What is Scheme Pays and how can it help you?
If you have an annual allowance charge because your pension has increased in value by more than your annual allowance in a single tax year you can ask NHS pensions to pay the resulting tax charge. Scheme Pays, is in effect a loan that would result in your final pension being reduced.
A little reminder on annual allowance figures
The amount you can contribute to a pension in a tax year has increased to £60,000 (£40,000 before 2022/23). This figure can be reduced (Tapered) based on your earnings. If you are unsure if you have been affected by tapering of your annual allowance you should check with your accountant or financial adviser, or carry out your own estimate here: Work out your reduced (tapered) annual allowance >
Assuming you have still breached your annual allowance with previous years reliefs fully utilised, you have choices on how to settle the resulting tax charge. You can pay the charge from your savings, make an NHSPS Scheme Pays election, or use a private pension if you have one and the provider can facilitate payment.
Please note you can only request Scheme Pays from the NHS pension scheme with respect to an annual allowance liability due to your NHSPS. It cannot pay a tax liability created by a personal pension.
This blog is detailing using scheme pays election but should not be considered a recommendation. All alternatives should be considered prior to making a decision.
Essentially, the NHS pension Scheme Pays this tax liability, charges you interest on this sum, which then reduces your benefits in retirement to repay this debt.
What is the interest rate charged on this loan?
Interest is added to the account each year on the 1st January, after applying for Scheme Pays. The interest rate is based on the previous September’s Consumer Price Index (CPI) figure, plus the Superannuation Contributions Adjusted for Past Experience (SCAPE) discount rate.
NHS pensions reserve the right to change the amount of interest charged following guidance received from the Scheme Actuary.
When is the deadline for Scheme Pays?
You must request Scheme Pays by 31st July in the tax year following the liability. So, for the 2021/22 tax year, it will be this July.
You do not get to elect which element of the pension scheme the tax is paid from. There is a calculation that attributes the liability proportionally if you are a member of two schemes.
How do I apply for Scheme Pays through the NHSPS?
You must complete: The Scheme Pays Election (SPE2) >
Here are some useful NHSPS Guidance notes >
Why is the tax year 2023/24 trickier than normal?
As mentioned in our previous article the NHSPS will not be issuing annual allowance figures for tax year 2023/24, however you are still liable to notify the HMRC of any excess over and above your £60,000 annual allowance (assuming no tapering has occurred). Our previous article has more details on that particular conundrum!
Can I alter my Scheme Pays in the future?
You can. This process becomes easier if you have ticked the ‘Estimate’ box in your first application. You will have to complete another Scheme Pays Election Notice (SPE2) and tick the box in Part B to confirm you are changing a previous election.
This must be done no later than 31 July, following a period of 4 years from the end of the relevant tax year to which your annual allowance charge liability relates. So if the charge is in the tax year 2021/22, you then have until 31 July 2026.
If your annual allowance charge has reduced, the NHS pension scheme will reclaim any overpaid tax from HMRC. If you have already retired your NHS benefits will be reassessed, and any additional NHS pension benefits paid to you. After October 2024, when the McCloud remedy has been actioned some members may find their past annual allowance position has reduced so could find themselves better off. If you are unsure how McCloud will affect your position, please get in touch so we can assess your situation.
If your charge has increased, the NHS pension scheme will pay any outstanding tax to HMRC. You may be liable for interest on the late payment.
What happens if I make a Scheme Pays election and then I die?
If this happens before you draw your retirement benefits, the NHS will write off the total amount owing.
If it is after your retirement, your pension benefits will already be reduced, and the initial dependent pension will be based on this reduced pension. This initial dependent’s pension is usually equal to the rate of the member’s pension in payment for the first three to six months if there is at least one eligible dependent child.
However, the continuing dependent’s pension is calculated on your unreduced pension, equivalent to 33.75% of the unreduced pension as if Scheme Pays election had not been made.
Conclusion
Like most things related to the NHS pension scheme, nothing is ever simple, so if you take nothing else from this article do remember you only have until 31st July to make your Scheme Pays election for the tax year 2021/22.
For more help figuring out if you have a liability, contact your accountant or Legal & Medical adviser.
Are you considering using Scheme Pays to pay your annual allowance tax liability? Let us know by adding a comment below.