The Doctor will not be seeing you now.
The ‘pension tax trap’ that’s affecting senior NHS doctors has been getting plenty of media attention over the past few months. But if you’re one of the senior doctors and consultants that’s directly affected by this issue, you’ll already know about the detrimental effect on your earnings.
Some doctors have been advised to use the “NHS Scheme Pays” option as a solution, but this, as we will see below, has a secondary trap waiting for the usnsuspecting pension patient. What a mess!
It works as follows. If you are subject to an Annual Allowance (AA) charge, you can either pay this directly to HMRC via the self-assessment system, or in some circumstances, you can ask your pension scheme to pay the charge on your behalf (Scheme Pays). NHS Pensions have confirmed to what extent Scheme Pays applies to members whose AA is tapered due to their level of earnings (refers to “earnings” generally above £150k).
The legislation will only allow Scheme Pays if the AA tax is over £2k and the growth in the scheme is above the £40k limit (not the reduced limit if an individual is subject to tapering). However, there is also a paragraph in the revenue’s personal tax manual (PTM056410):
“There is a maximum amount that a member can ask their scheme administrator to pay under these circumstances based on the pension input amount in the scheme which exceeds the annual allowance.”
This means that the NHS Pension scheme will only pay the tax charge on the excess over £40k. So if a member has a £60k growth in their pension and a tapered AA limited of £10K, NHS Pensions will only pay the AA tax on £20K, (being £60k – £40k). The member will have to pay the tax on £30k (i.e. £40k – £10k) via their Self Assessment return.
Any clients affected we can write to ask for a voluntary scheme pays to be considered but it is unlikely any will be. The Department of Health (DoH) are currently monitoring the position as use of Scheme Pays is quite low. If members are opting out as a result of not being able to Scheme Pay the whole amount, NHS pensions may well refer them to the DoH.
If you need advice on NHS pensions and how you can avoid the tax trap please call 0114 275 6292 or email firstname.lastname@example.org.