AISMA welcome pension tax charge reprieve following change to scheme pays election rules

Following lobbying from the Association of Independent Specialist Medical Accountants (AISMA) and other bodies, changes in the rules around pension annual allowance tax charges will bring welcome relief to doctors in England and Wales facing unprecedented tax bills in January 2019. The changes mean higher earning doctors can elect for the NHS pension scheme to pay over the tax on the full annual allowance charge, instead of having to find significant amounts of cash themselves from their own funds.

For the 2016/17 tax year members of the pension scheme could only ask the scheme to pay the tax on the excess over the standard annual allowance of £40,000. However, some higher earning doctors have their annual allowance tapered down to £10,000 which meant their tax bills were significantly higher than in previous years (see example).

The Department of Health and Social Care has now instructed that for 2017/18 the NHS pension scheme should pay over all the tax on the excess over the tapered allowance. The Scottish pension scheme has already adopted this rule change.

AISMA representative David Walker, a tax adviser at accountancy firm MHA Moore & Smalley, said: “The change in the rules will alleviate the immediate cashflow worries of doctors facing many thousands of pounds in extra tax charges.” Mr Walker went on to explain: “Doctors who elect for the scheme to pay the tax should understand that there will be a larger reduction in final benefits paid by the pension scheme. This will need to be factored into any decision the doctor makes about whether to elect for the whole amount of tax to be paid by the scheme.”

“Advice should be sought from a suitably qualified financial adviser who has specialist knowledge of the NHS pension scheme.”

Example
In 2016/17 a doctor with pension benefit growth of £60,000 and a fully tapered allowance of £10,000 (and no unused allowances available from earlier years) could ask the pension scheme to pay the tax on the £20,000 above the standard £40,000. However, he or she would have to pay the tax through their self-assessment on the balance of £30,000 above their tapered allowance of £10,000.  For a 45% tax payer, this amounted to a further £13,500 in their January 2018 payment, plus payments on account for the following year.

In 2017/18 a doctor in the same situation can now ask the scheme to pay the tax on the whole excess of £50,000.