The 2020 Budget and how it impacts your NHS pension

It was Rishi Sunak’s first budget and he didn’t disappoint…well from a pension perspective anyway.

Over the past eight years, NHS Pensions and its members have been on a rollercoaster ride of tax lows and tax highs.

There had been a lot of talk about reducing the tax savings on pension contributions which didn’t happen, but the biggest announcement was increasing the threshold income for annual allowance purposes from £110,000 to £200,000.  

You might be asking: what does this mean for me? Let me explain the history and why this is such a big win for the medical profession.

We have seen hundreds of clients over the past 18 months receive huge tax bills for simply going to work and working hard to support the NHS. This tax charge has resulted in many doctors considering their pension position and whether working the extra PAs or sessions was worth it. For some clients, it became apparent that they were worse off financially by remaining in the scheme.

Whether the changes above will have any effect on you depends on the role you have within the medical profession. Either way, it’s useful to understand how it works so you can ensure you never have an issue.

The history

In 2011, the government reduced the annual amount of money you could place into a pension scheme from £255,000 down to £50,000. Initially, this wasn’t a problem for medics, and we saw very few clients exceeding growth of £50,000 in their annual pension input amount.

In 2014, the government reduced the Annual Allowance further, to £40,000. Again, we didn’t see too many issues for medics at this time. This was mainly down to the ability to carry forward unused allowance from the previous three years, which meant even if you exceeded £40,000, you likely had contributed less than £40,000 in previous years and therefore could offset the amount you exceeded the annual allowance by.

An example below:

In the example above, an individual has exceeded the annual allowance for the 2019/20 tax year. It could be a spike in profits for a GP or an increment for a hospital doctor that has contributed to such a large growth in this year.

Whilst this initially looks concerning, there is carry forward from the previous three years than can be used to offset the high growth figure.

You start with the furthest year first, so you would consume £12,500 carry forward from the 2016/17 tax year and then £7,600 from the 2017/18 tax year and so on until the £22,000 excess has been covered.

If there isn’t sufficient carry-forward, you will likely have a tax charge and need to seek professional advice as to how you should deal with this. A specialist financial adviser or accountant can help.

Transition year 2015/16

In 2015, the then Chancellor, George Osborne, announced a change to something called Pension Input Periods.

This is a change in the start date and end dates for contributions into pensions. All pension schemes have different start and end dates and this move was to bring all pensions in line with the tax year end. Prior to this, the end date was 31st March for the NHS Scheme. In 2015, it was moved to 5th April.

This meant there was a strange year called a transition year in 2015/16, where there were two pension input periods. One ran to 8th July 2015 and the other from 9th July 2015 to 5th April 2016.

This helped delay the Annual Allowance taxation issues further, as it meant many medics gained the ability to carry more Annual Allowance forward from this year.

Tapered Annual Allowance

We discussed earlier the reduction in the Annual Allowance from £255,000 to £50,000 and then to £40,000. We shared an example of how carry-forward works when you have the full £40,000 Annual Allowance available - but tapering is where the issues really began.  

In 2016, the government took their reforms a step further, with the potential that your Annual Allowance could reduce to £10,000. This relied on two tests: threshold income and adjusted income.

To make sense of how this works, it’s best to show an example.

A hospital consultant (band 6) earns a basic pensionable salary of £95,795 gross per annum and has 3 CEA awards of £9,048 (all pensionable). They complete two additional PAs and earn a further £22,000 including out of hours pay.

This means a total gross income of £126,843.

They physically make pension contributions of 13.5% on pensionable earnings = £14,558.

Total income – pension contribution = £112,284.

This is above the threshold income of £110,000. We therefore need to complete the second test known as the ‘adjusted income’ test.

We take the gross income of £126,843 and add to this the Annual Allowance growth (Pension input amount). We then subtract the employee contribution of £14,558.

If this exceeds £150,000, tapering applies.

In the above example, the consultant had growth of £62,000. This meant the adjusted income was £174,285, and above the £150,000 limit.

For every £2 above this limit, the consultant lost £1 of the £40,000 Annual Allowance.

This means they have a reduced amount of Annual Allowance of £27,857 for this tax year.

We assume in this example that all carry-forward has been used in the previous year and therefore the only allowance remaining is £27,857.

As the growth was £62,000 this means an overcontribution of £34,143. This overcontribution means a tax charge of 40% = £13,657.20.

This can either be paid directly to HMRC via self-assessment or via the ‘scheme pays’ regime which is where you allow the NHS Pension to pay the tax charge for you.

The changes to threshold income – from April 2020 onwards

The announcement by the Chancellor means that most medics (apart from those earning above £200,000 after pension contributions have been made) will retain the full £40,000 Annual Allowance.

You could still be impacted by tapering in years when you see increments, CEA awards or increases in private earnings.

We strongly urge you to write to the NHS pension agency and request Annual Allowance pension input figures since 2010 or the earliest point you joined the NHS Pension scheme if later.

They will not send these figures to you automatically and it’s your responsibility to check the growth in your pension scheme each year.

It will take up to three months to receive the information. You then need to apply the rules mentioned above and see if you have any unknown tax charges, and also if you have any carry-forward which can be used for future tax years.

If you require support with your Annual Allowance figures, please get in touch. We can provide you with a template letter to request the correct information from NHS Fleetwood.

Get in touch

Have you been affected by the Tapered Annual Allowance? Or do you have questions about the NHS pension scheme? If so, please get in touch. We specialise in advising doctors, dentists, locums and other medical professionals, so please email info@medicalandgeneral.co.uk or call (01404) 515544 to find out more.

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