Annual Allowance Pension Savings Tax Charges

Pensions are one of the pots of money we look forward to when working. Normally accessible when you retire but save excessively into pensions, and you will be taxed for it now.

The Annual Allowance is a limit set by HMRC, relating to the maximum amount you can accrue in a pension in any one tax year, whilst still benefitting from tax relief. Go over it in most circumstances and you will be subject to a pension saving tax charge.

Over the years, various changes have happened to what we all know as the pensions Annual Allowance. From the total amount being reduced, to the threshold income limits being increased. One thing that hasn’t changed for some working in the NHS is the idea that if they work too much, they will not only be taxed on what they earn but at what level their pension pot grows by over the year. This has led to certain individuals reducing their hours or leaving the profession altogether.

What is the current pension Annual Allowance?

The current pension Annual Allowance stands at £40,000, down £10,000 compared to ten years ago when it was £50,000. Inflation however has grown over this time, and so has the average nominal pay of those working in the NHS.

NHS Pension growth is linked to the Consumer Prices Index (CPI), and in the current climate where inflation is high, certain individuals may run into pensions tax charges through no fault of their own.

While not the only variable factor in the calculations required by HMRC, the simple to remember (inverse) rule is unexpectedly one.

When CPI increases, that can spell good news for NHS pension members. Conversely, when CPI is low or drops suddenly, this can spell bad news and an increased potential to incur a tax charge.

Excess contributions over the Annual Allowance are chargeable at income tax rates which mean individuals could be taxed anywhere between 20-45% on the excessive growth in a member’s NHS pensions (remember most individuals have membership of more than one NHS pension pot), depending on their level of income.

When does the taper of the allowance come into effect?

The taper of the allowance doesn’t kick in until you reach a pre-determined level of income:

£200,000 is the Threshold Income Limit and £240,000 is the Adjusted Income Limit.

This is up from a previous years when it was £110,000 and £150,000 respectively. Surpass these limits and the members Annual Allowance decreases by £1 for every £2 in excess.

Those with higher levels of pay should be aware of the potential tapering down of their annual allowance and the above limits as the growth of their pension pots is combined with their income to arrive at the total Adjusted Income. Meaning, if an individual’s pension growth is £62,000, and their income is £200,000, the total adjusted income would be £260,000.

This is well in excess of the Threshold and Adjusted Income limit meaning the individual would have a tapered Annual Allowance of £30,000. If the total Adjusted Income of an individual exceeds £312,000 it would mean the individual is entitled to the minimum Annual Allowance which is currently £4,000.

What about private pensions?

Private pensions are an area for individuals to review when trying to minimise pension savings tax charges. NHS Pensions do not provide a Pension Savings Statement if you are within the annual allowance for the year. It is therefore up to an individual to calculate the growth they may have in a year and the remaining allowances they have for private contributions.

Many of those within the NHS pension fail to realise this and top up their private pension pots throughout the year. The perceived tax benefit they are receiving then turns into a tax burden when they come to complete their tax returns for the year.

This means, that when you have additional income from other sources, other than your main NHS work, NHS pensions are unaware of this and may not send to you a pension savings statement, which is normally the trigger for you to consult with your specialist medical accountant/financial adviser.

However, these calculations continue in stealth regardless!

Could a promotion in the NHS lead to an excess tax charge?

A promotion within the NHS could also lead to an excess tax charge, as those who have historic membership of the 1995 scheme have pensions linked to their final salary. This is less common for those within the 2015 scheme as their pension is linked to their average pay.

Unused allowances of the past three years can be carried forward to offset against the current year’s excess.
Members of the NHS Pension scheme can elect for the scheme to pay the charge. This option is called a Scheme Pays Election, whereby the pension scheme pays the tax charge now and it is recovered from the members’ pension pot at retirement.
Where members of the NHS pension also have personal pensions, they should seek specialist financial planning as these personal pensions may in fact, be used to cover an annual allowance tax charge created by excessive growth in the NHS pension. The result is a potential for the retention of a higher level of pension, benefitting from all of the additional rights and guarantees of the NHS pension arrangement.

What is the deadline for reporting an annual allowance tax charge?

The deadline for reporting an Annual Allowance tax charge is in line with completing a tax return.

This is because the tax charge is reported on your tax return by completing the Additional Information pages, a summary of the amount in excess would be disclosed on these pages. Failure to do so can result in interest and penalties being levied on any unpaid tax

Can MHA Moore and Smalley help me with my pension?

Pensions can be technical, especially when it comes to Annual Allowances and their interaction with the NHS Pension scheme.

If you have received a Pension Savings Statement and are unsure of its impact, or if you have not received one and believe you may have a pension tax charge. Please contact our healthcare team through the form below.