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Julie Sebastianelli, Director at Hurley Partners
Doctors, Surgeons and Consultants may need a pension healthcheck

Julie Sebastianelli explains why doctors, surgeons and consultants in the NHS Pension Scheme have pension Annual Allowance  taxation problems. Already this subject has received wide media coverage and yet more cases keep appearing. But the same issue applies to any higher earning individual in a defined benefit scheme.

The problem arose with the introduction of the tapered Annual Allowance which reduces the headline annual allowance of £40,000 down to, as low as £10,000. The annual allowance is the maximum tax relievable contribution and/or pension accrual for a tax year across all schemes of the individual.

For defined contribution schemes, the contribution is simply the pension input value, however,  for a defined benefit scheme it is more complicated and can usually only be confirmed  by the DB Scheme administrator.

In summary, the individual’s pension entitlement at the beginning of a tax year is multiplied by a factor of 16. It is then indexed to the end of that pension year by the annual CPI rate as at the preceding year’s September. This figure is deducted from the end of year pension entitlement, multiplied by 16 and the resulting pension accrual is the pension input value.

Where an individual has had a pay increase, or, like senior NHS staff worked extra hours, this extra remuneration will have boosted the pension accrual increasing the pension input value.

This increased remuneration has a detrimental impact as once total taxable income exceeds £150,000, it has the effect of reducing the individual’s Annual Allowance. These opposing features can result in the tax charge applicable to the excess pension inputs being a significant proportion, in some cases greater than the actual remuneration received!

It is apparent that although the tapered allowance has been in place since the 2015/16 tax year, many individuals and indeed some taxation professionals have incorrectly interpreted the reporting of pension inputs on tax returns meaning unpaid tax from earlier tax years may arise. These tax charges can be substantial, and in some cases the “scheme pays” option may be required. Where it does, the pension scheme must receive the individual’s request to pay the charge no later than 31 July in the year following the tax year in which it was incurred.

This might seem a comfortable timescale, but where tax returns are left until the last minute individuals may find the pension input information required takes some months to obtain leading to late return penalties and no time to meet the scheme pays process.

The “scheme pays” process itself requires careful analysis. Whilst it avoids the need to find the tax personally, if met by the Scheme it results in reduced retirement benefits on a highly complex formula which needs to be understood and assessed. Whilst there have been a raft of political statements promising possible solutions in reality we are unlikely to see changes anytime soon.

The problems emphasise the need for pension and tax professionals to work together in a timely manner to give their clients correct information on which to base decisions.

To find out more on this subject visit www.hurleypartners.co.uk or contact Julie Sebastianelli at Hurley Partners on 020 8936 3970/0161 376 7579 or by e-mail – julie.sebastianelli@hurleypartners.co.uk

Hurley Partners strongly recommends that individuals should seek suitable professional advice regarding the matters referred to in this document, which has been prepared for general interest only. Nothing in this document constitutes advice. Hurley Partners Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 8401891. Registered Office; 12 Conduit Street, Mayfair, London, W1S 2XH. © Hurley Partners Limited 2019