Nick Crabbe from Leeds and Worcester wealth management and financial planning firm Manse Capital considers The Latest Attack on your NHS Pension – “The Tapered Annual Allowance”
The Government has for some time been mooting the idea of removing tax relief on pension contributions for those paying the highest rate of marginal tax (i.e. those earning more than £150,000). However, in June’s budget they announced a policy that for some higher paid individuals in Occupational Pension schemes, is more detrimental than simply removing tax relief on the employee contributions. It is now, in certain circumstances possible for those who are high earners and in Occupational Pension schemes to be presented with a tax bill from HMRC that is greater than the tax relief they would have lost in the first place.
However for most it won’t. In this example we look at a theoretical Hospital Consultant on a 12 PA contract earning £145,000 pensionable income a year (approximate top scale Consultant with a Bronze award or 9 CEA points) and an additional £29,000 through PA’s and on call allowance. They would have paid 14.5% to the pension scheme (£21,025 pa) and the tax relief they would have received would have been £9,787 (£21,750 @ 45%).
However, under the new Tapered Annual Allowance legislation their total income is examined and any private work is also added on. If the total income is greater than £110,000 the NHS income is artificially inflated to take account of the employer’s pension contribution to the NHS pension scheme as well. As such, if they earn £145,000 pensionable NHS income and have an additional 2 PA’s and some on call work, their NHS income would be approximately £174,000. If they are in the 1995 section of the NHS pension scheme the “deemed employer contribution to the pension scheme” would be approximately £12,600 giving a total income for the year of £186,687. As this total income figure is greater than £150,000 the Tapered Annual Allowance starts to come in to effect.
For every £2 over £150,000 that is earned the annual allowance is reduced by £1, so in this example the annual allowance is reduced by £18,343 (£186,687 – £150,000 /2) . This means that the Consultant now has an annual allowance of £40,000 – £18,343 = £21,657. Their total contribution to the pension scheme for annual allowance purposes would have been approximately £34,000 (as it is a final salary scheme and not a money purchase arrangement) and so they will have exceeded the tapered Annual Allowance by £12,343. This would give rise to a tax bill of £5,554 if there was no carry forward of unused allowance from the previous three years. In these circumstances the tax bill is still lower than the tax relief but would still be painful enough to have to stump up for. In addition to this it is highly likely that the Consultant has also already exceeded the Lifetime Allowance and as such any new benefits they accrue going forward will also be reduced by a charge of 25% for benefits taken as income (from the NHS) or 55% if the benefits are accrued in a personal pension pot.
The caustic combination of these two tax charges needs to be considered carefully and in some cases it may now be advisable for some members of the pension scheme to de-opt and cease membership. However, it must be stressed that each case needs to be carefully assessed on its individual merits as the scheme also provides very valuable secondary benefits such as death in service and widows and dependent benefits.
Am I likely to be affected?
If you earn over £110,000 in total and are a member of the NHS pension scheme you may be affected by the new rules. As to whether or not it will trigger a tax bill will depend on whether or not you have any carry forward of unused relief available. It is likely that the majority of members will not have a tax bill in 2015-16 due to unused carry forward and a transitional tapering allowance that is being applied to this tax year. Going forward more people will be liable to additional tax in 2016-17 and an increasing number after this as carry forward allowances are used up.
What Should I do?
At your next review your Financial Planner will be able to advise what your situation is likely to be and provide some guidance.
If you are a high earner (above £150,000 pa total income) and are already aware that you have no carry forward available then you should contact your adviser before next April.
If you have friends or colleagues who are confused by the situation or would simply like a second opinion from a Financial Planner, please mention Manse Capital to them and they can take advantage of our Second Opinion service without charge or obligation.